Getting Started in Property Investment

When it comes to building a retirement nest egg for the future, property is still viewed as one of the safest long-term investments.

While some investors may want to buy and rent it out straight away, others may choose to live in the home while they renovate it.

Investing in bricks and mortar can be a great way to create wealth, but there are a few things to consider before diving into property investment.

Know your budget

It’s essential to have a thorough understanding of your cash flow. You should ask your bank for pre-approval of your investment loan so you know how much you are able to borrow before you start your property hunt.

Don’t underestimate ongoing costs

Make sure your budget allows for extra costs such as insurance, and general maintenance and repairs.

Buy in a growth area

Find a property in an area where there is strong demand for rental properties. Buying close to schools, universities, public transport and shopping centres will make it more appealing to renters.

Be realistic about your investment goals

Are you looking for fast capital growth, or do you want to hold the property long term? During a strong market period, it will be easier to renovate properties and sell them for quick profit. But in slower economic times, it can take years to achieve the same growth.

Look for essential, not extravagance

A rental property only has to be functional and clean. Don’t over capitalise or be persuaded to buy a property simply because it has a stylish interior.

Think carefully before negative gearing

If the rent you receive does not fully cover your loan repayments, your property will be negatively geared. This can have tax advantages, but it will also lead to financial stress if you don’t have the cash flow to cover loan repayments, rates or body corporate fees.

Still paying off your home?

It isn’t necessary to have your home completely paid off before purchasing an investment property, however it is a good idea to have a large portion of your own home paid off along with other debts such as credit cards. 

Property Investment 101

Property investment can be financially rewarding, however, before investing you first need have a clear idea of what you want to achieve.

What’s the best investment choice? Established property, off-the-plan, newly built, or a property with potential to grow in value immediately after renovation?

On paper new property often seems to tick more boxes, but the best answer is "it depends". The right investment choice is dependent on each individual's investment goals and their stage in life.

There are many articles and books out there that claim to have “the secrets to successful property investment”. There are no secrets – you just have to know all the facts, do your due diligence, know your numbers, and know what your own investment goals are.

Established property can have an edge on capital growth, but new properties bring the benefits of depreciation, which can help investors with cash flow.

At present, the government also has incentives in place to stimulate new housing – so this should also be taken into consideration.

If cash flow, rather than capital growth is your priority, then finding a positively geared property is what you’re after. Positively geared properties are those that produce more investment income (i.e. rent) than the interest expense (and other deductions). Yes, these are a little harder to find, but still possible.

A common strategy is to buy something established that generates a good rental income as well as good capital growth (which you then tap into to buy a second property). This means you are not under too much strain to service your loans.

Some experts believe that capital growth should be an investors’ priority. They believe it’s buying the right property at the right location that's going to make you money, and not the odd dollar that you save in your income tax.

Only about 15 per cent of investors buy a property to add value. Renovating suits experienced renovators or investors who are not desperate for rental income on settlement. Properties can be vacant for months during renovation and you have got to take that into account.

While renovating a property can increase its capital growth and rental yield, investors should be aware that the interest payments made when their property is being renovated are not tax-deductible, because the property is not available for rent. Instead, that period of interest payments is added to the property's capital value and is deducted from any capital gain when the property is sold.

It’s important for all investors to collect all the facts, and in most cases gain some financial advice before investing in property. Not doing all the work up front can result in a disappointing investment.