Buying an investment property has been the path to prosperity for millions of Australians, but whether you’re wanting to create wealth, planning for your retirement or looking for tax benefits, you need to be informed, crunch the numbers and keep a cool head.
1. Market research
Nobody likes homework, but when it comes to perhaps the biggest investment you’ll ever make, you can’t afford not to do your research.
There's a big difference between buying a home to live in and one that will generate the best income and the strongest capital growth.
Rental returns are generally highest in areas where there is strong demand from tenants, typically close to transport, amenities, universities and schools.
City living, in particular, appeals to students and young professionals who love being close to both work and play, and strong inner-city demand means higher returns and lower vacancy rates for landlords.
From a capital growth perspective, 'upcoming' areas and suburbs undergoing gentrification can pay the fastest dividends, as can pockets where prices are on the rise again after a period of slow or negative growth.
There are many free online sources of useful data, such as Residex and the Real Estate Institute of Victoria, which provide suburb-by-suburb reports, statistics and insights. And you can search our listings to get an idea of current trends in the market.
Once you’ve narrowed down your search, be sure to speak to the real experts on any neighbourhood - the locals and real estate agents who live and work there. If you’re looking to invest in Melbourne’s CBD and inner suburbs, contact our experts for the latest insights into this specialised market.
2. Do the maths
Your path to profitable property investment begins with a clear budget. This will help you understand how much you can afford to invest and borrow, and what your cash flow will look like once you have a tenant in place.
Ideally you should already be comfortable with your current financial situation and have other debts, such as credit cards, well under control.
When calculating the full cost of an investment property, remember to factor in stamp duty, legal costs and mortgage insurance (if needed), plus funds for any improvements or renovations.
Once you've done the numbers, approach your bank for a loan pre-approval so you know how much you can spend before your property search begins.
Remember, owning a rental property will generate income for you but also expenses. Make sure you budget enough for rates, insurance, maintenance, the occasional vacancy and the services of a good property manager.
3. Head not heart
It’s important to check your emotions at the door when investing. Don’t choose a suburb or building simply because you’d like to live or holiday there. When it comes to rentals, think clean, low-maintenance and functional.
When inspecting a property, poke around for signs of potentially expensive problems you may have to rectify before installing a tenant.
Look below sinks and on walls or ceilings for signs of water damage, and check the condition of any gutters, downpipes and the roof.
Before signing an unconditional contract, consider investing in a building inspection to avoid unwanted surprises and ensure termites won’t be eating into your profits. Major structural issues can be hard to spot, so expert advice is well worth the price.
Once you’re confident you’ve found the right property, set yourself a limit to what you’re prepared to pay and stick to it. Don’t let your heart get ahead of your head.
4. Negative gearing - pros and cons
Negative gearing is where you borrow money to invest but the income from your investment doesn’t cover your expenses. It is a popular strategy with property investors, who use it as a tax vehicle to offset short-term losses in the pursuit of long-term capital gains.
However, it is important to bear in mind that if you are making a loss, your investment is costing you money. This only makes sense if a) you have another source of income to fund the outflows, and b) you are confident that your long-term capital gains will exceed those short-term losses.
If you don’t plan your cash flow carefully, you could struggle to cover loan repayments, rates or body corporate fees.
5. Don’t make these common mistakes
Sure you’ve heard about property flippers making a fortune overnight, but that’s seldom the reality. Look at property investment as a long-term game and you’re more likely to be rewarded.
It’s easy to get carried away when repairing or renovating a property for rent. Remember, it’s more important that rentals are bullet-proof than beautiful, so don’t overcapitalise on expensive fixtures and fittings when functional will do. You may not recoup the extra outlay in either increased rent or capital gains.
Managing a rental property yourself might sound simple, but it can be time-consuming and stressful. In addition to advertising for and vetting tenants and arranging lease contracts, DIY agents have to collect rents, organise repairs, conduct inspections, negotiate rent rises and resolve any disputes.
A property manager can take this legwork and paperwork off your plate - and the best part is, their fees are tax deductible.
For agile, innovative and professional expertise to support your Melbourne property venture, speak to one of our Galldon property experts on 03 9670 3330 or email email@example.com