If you are considering purchasing an investment property it is important to get it right and do thorough research to ensure you get the best return possible and avoid any costly mistakes.
Here are 10 tips all property investors should understand before entering the investment property market.
1. Investing is a business transaction
As much as we like to turn the meat on a BBQ and tell our friends about that flash new house we own in that trendy suburb, its not much good beyond that if it underperforms and doesn’t help us achieve the goals we have in mind. So remember to use your head and not your emotions when selecting an area and a property to invest in. Ensure the investment property you are considering purchasing meets the criteria that are in demand from potential renters in the area and not necessarily your criteria for a home. Remember, you won’t be living there yourself.
2. Set your financial goals
Goal setting is extremely important as a real estate investor. Without goals it is hard for any investor to be truly confident in knowing what their next steps should be. The key is to carefully consider your interests, current lifestyle and future desires before setting your financial goals. Goal setting is the key ingredient to most successful organisations and individuals alike. If you lack direction, motivation and drive can quickly falter away also which is when most investors are usually confronted with fear and procrastination. By setting goals, you can create a clear vision of what you want to achieve, by when, and build steps on how to achieve these goals. You will be surprised by how your motivation will grow exponentially!
3. Determine your property investing strategy
As a result of setting goals, you’ll now need a strategy to reach them. Everyone’s circumstances are different, so it’s important to develop your own personal investment strategy. Developing your own investment strategy will set a direction for you to move forward in creating wealth and will also help you focus your searches on properties that fit your strategy. When determining the right strategy for you, it is important to consider lifestyle, risk, time, borrowing capacity, and available equity. Investment strategies could include buy and hold, renovate and hold, renovate and flip, develop, positively geared properties, buy and subdivide, discount properties and many more.
4. Build a trusted team of professionals
Many novice real estate investors forget to pause and give thought to the assistance they will need throughout the process of planning, finding, buying, leasing and selling their investments. It is imperative to surround yourself with the right team of professionals who either specialise in or understand property investment. Obtaining the right professional advice and guidance eliminates the risks of making costly mistakes. It is important to have the right accountant, independent researchers, buyer’s agent, finance broker, conveyancer, insurance broker, and coach to help guide you in the right direction. Remember they all need to be stand alone and unbiased property professionals!
5. Purchase using the right ownership structure
It is important to consider the right ownership structure before purchasing a property, as you won’t be able to change it later on, without attracting significant additional costs including stamp duty and maybe even capital gains taxes that could have been avoided. Do you purchase in your individual name, through a partnership, through a company or through a trust? Everyone’s situation will be different and the right ownership structure will vary depending on your situation, financial desires and long-term strategy. It is important to get the right guidance on this before making a purchase. Talk to your accountant and financial planner for this part.
6. The correct finance structuring
Not obtaining the correct finance structuring advice could result in a costly mistake. A loan structure will influence many things including the interest rate and fees you pay, the amount of tax that you pay, the amount of flexibility you have, your access to additional finance and so on. There are many factors to consider whilst ensuring you obtain the correct finance structuring for your investment property. For a lot of investors, avoiding cross-securitisation can prevent you from being hamstrung by one financier. This is where a loan is reliant upon more than one property as security & this can have negative consequences.
For example you may want to borrow more than 80% of one investment property and loans are cross-securitised, the mortgage insurer will charge its mortgage insurance premium on all your lending, not just the new loan which could cost you thousands of dollars. Another example of why you should avoid cross-securitisation is if you sell a property, the bank can control your sale funds and demand that you use all of the funds to repay debts (whereas, perhaps you only intended to repay the debt associated with the property you sold and keep the residual cash)
7. Location, Location, Location
This is one of the most important factors to consider when entering the property market. Investing in the right location will ensure strong rental income and capital growth for years to come while poor locations are less likely to see major changes in price. There are over 15,000 suburbs to choose from in Australia. In researching the best location some of the factors Portfolio Property Investments consider include infrastructure investment, demographic analysis, proximity to amenities, vacancy rates, population growth, the health of the local economy, affordability and many more.
8. Know your costs
There can be many ongoing costs when you buy an investment property. It is important to know your costs before committing to the purchase of a property. Ensure you take into account costs such as council rates, potential vacancy periods, management, accounting, legal fees, strata payments, insurance and repairs and maintenance when calculating the return on investment. Portfolio Property Investments recommend a Property Investment Analysis is conducted on every property as a key part of your due diligence.
9. Know your exit strategy
Always start with the end in mind. Know what you are going to do with the property before you buy it. Know what exit strategies are available for you, and plan, from the start, how you will exit. Exit strategies could include selling to pay off your debt, move one of your loans to principal and interest, live off the equity gains and increases in rental yield or hand it over to your kids.
10. Have a coach or a mentor
A coach or mentor is someone who has walked the path before you. They will help you on the right path to ensure you don’t make any costly mistakes. Investing on your own through trial and error may cost you thousands in mistakes. Such mistakes include – buying in the wrong location, buying the wrong type of property that is not the best fit for your financial situation, buying a property and finding out you can’t afford it, putting all your eggs in one basket and many more.