Investing in the property market is a great way to grow your net worth, as well as generate a stable stream of passive income. However, a poorly researched investment can cause a great deal of stress in your life, and could cost you hundreds of thousands of dollars.
So how do you differentiate between a great opportunity, and a risky plunge? Here are some tips to help you navigate your way to financial freedom and avoid a nightmare investment.
Do your homework
As simple as it sounds, many new investors don’t do sufficient research before purchasing an investment property. Here are a the key things to consider:
Zoning – checking the zone of a property before you purchase is crucial, as the wrong zone could put an abrupt halt on those renovation plans you had.
Location Location Location! – Check the surrounding area. Is it an in-demand area for purchasers and renters? Is the property close to public transport, schools and local shopping? The desirability of an area will greatly impact the capital growth, rental yield, and vacancy rates for the property you want to purchase.
Potential – does the property have potential for capital growth? Is there potential for development? A great investment is one with great potential.
Recent Comparable Sales in the area – Always check the recent sales in the area to ensure you don’t spend more than market value on the property. The recent sales information can greatly impact the negotiation process.
Crunch the numbers
The numbers define whether or not a property is worth the risk. In an age where information is available at the click of a button, you don’t need to be an accountant or mortgage broker to know what to look for. Some key figures that should be considered are:
Net Rental Yield – Net rental yield = [(Annual rental income – Annual expenses)/total property cost] x 100. This simple equation should heavily influence your decision to buy the property or not. If your plan is future development, you may be satisfied with a yield that will cover your holding costs in the meantime, however if your goal is secure passive income for the future, then the rental yield needs to be much higher.
Vacancy Rates – Ask for a rental history on the property to ensure you aren’t walking into a problem. if there are gaps in the history, ask the agent about them. Speak with the current tenants to make sure they are happy and see what can be improved. After all, an investment that can’t be leased isn’t much of an investment at all.
Repayments – Speak with a mortgage broker about your lending options, and make sure you have a clear figure of the repayments to be made per month. Don’t overextend yourself to the point where the loan repayment is 100% reliant on the rental income. Ensure you leave at least one year’s repayments in an offset account as a backup, in case the tenant vacates unexpectedly or you have some urgent repairs that need to be done.
For a detailed and customized investment analysis, speak to Chedid Property.
Speak to the experts
Using the right resources at the right time will greatly impact your success as a property investor. You shouldn’t commit to the purchase of a property before speaking with the following experts:
Your Accountant – Knowing what tax benefits your potential investment has could greatly influence your purchasing decision. Newer properties offer greater potential in the tax area through depreciation, however older properties with a lower yield could be what you are needing to take advantage of a negatively geared investment.
Your Solicitor – Are there any issues with the contract that you need to know about? Does the contract contain anything that would change your mind about this property as an investment? These are important conversations to have with your legal advisor. The legal structure which you set up to purchase the property can also be important depending on other financial situations in your life.
Financial Advisor – It is good to make contact with a financial advisor before you begin searching. This can give you a better idea of what to look for, whether you want to invest in commercial or residential real estate, and also provide clarity around and confidence in the amount you can comfortably spend on the investment.
Your Real Estate Agent – Obtaining a rental & sales appraisal from your real estate agent is a crucial part of the decision-making process. Be wary of the numbers being used to sell the property as they may be inaccurate or over inflated to further entice the less astute investor.