Anyone who thinks they can simply launch into setting up a property investment portfolio without doing their research will find they have a lot to learn. Buying an investment property is a complicated business for newcomers to the game, and there’s a lot more involved in property investment than there is in stocks. There are legal and financial aspects and a whole lot of due diligence required in real estate investment. You’ll need a pretty solid knowledge of the real estate industry, housing markets, local council requirements, insurance, loans and many other details before you take the plunge and buy your first property. However, before you throw your hands in the air and give it up as too hard or confusing, you can begin here and get a few fundamentals down before you dig deeper.
1. Location Matters a Whole Lot
You've heard it before no doubt but it’s a tried and true saying - ‘there are three things to consider when investing in real estate: location, location and location.’ If you’ve found an investment property you think is just right, wait before you make an offer and pay the deposit. First, check whether the location is worth it. If it’s on a great street in a great suburb, this old but good advice is what you follow: You find the worst house in the best street. Why? Because this one will provide you with a good amount of equity and you will want to build plenty of equity. Buying this ‘worst’ house means you can invest some cash into renovating it and then sell it on for a higher price than you paid to someone else who wants such a house in that great locale. It’s called ‘fixing and flipping’.
2. Search Out Wholesale Properties
There is one similarity with regard to investing in the stock market and property investment and that is in both cases you want a good deal, the best deal you can muster. Savvy stock market investors don’t buy too many stocks at high prices if they want to hold them for an extended period of time. Rather, to succeed you could do what famous, highly successful US businessman Warren Buffet did - he got greedy when all around him were full of fear. He bought stocks that were beaten down and made a fortune when they turned around. It’s the same in the property investment game. Don’t ever pay the full price for a property, but search out ‘wholesale properties’ that will need work. Do your figures to find out if investing in a renovation will hike up the future sale price. The way to figure it out is asking yourself whether investing $20,000 on a reno will mean you can add twice as much as that on a sale price to maximise your return.
3. Get a Grasp of the Tax Benefits
Governments want private investors to provide the population with houses in which to live because they know if investors don’t then the government will have to do it. The Federal Government(1) provides a 10 percentage point capital gains tax (CGT) discount for Australian residents who invest in qualifying affordable housing. The CGT discount is to 60 percent and to qualify, the housing has to be for low to moderate income tenants, and the rent must be discounted below the rates in the private market. If you decide to invest in housing to take advantage of the CGT discount, you must understand that the housing must be managed through a registered community housing provider and the investment held for a minimum of three years in aggregate. You can claim a broad range of operating and management expenses for your investment property income, including:
- Council and water rates
- Reasonable travel expenses to inspect your property
- Real estate management fees
- Advertising for tenants
- Interest on your investment loan
The most important thing is to keep records, documentation, receipts and bank statements so you have everything you need at tax time. You will need an accountant to sort out depreciation and capital works schedules.
4. Keep an Eye on Your Credit Rating
You’re probably going to need to borrow money to invest in real estate so do get a copy of your credit history because if there are problems there, the banks have tightened their lending practices and won’t look at someone with a dodgy history. If you find a mistake, have it rectified as soon as possible, and if you have been a bit lax in the past, you need to pick up your game. Your credit rating has to be immaculate because banks will not lend as readily to investors as they will to those whose purchase will be their primary residence.
5. Use the ‘One Percent Rule’
To decide on whether or the property you intend to buy and rent out to tenants is worth the price you’ll pay, use the ‘one percent rule. It means an income producing property has to produce one percent of the price you paid for it each month. For instance, if you’re considering buying an investment property for $200,000, then the monthly rental income should be 200 x 1 percent which is $2,000 a month. There are some fantastic borrowing power calculators for investment properties out there that can assist in this process.
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Alex Morrison has been a SEO Expert in Melbourne for over 10 years. In this time he has worked with a range of businesses giving him an in depth understanding of many different industries including home improvement, financial support and vehicle signage. As the owner of Integral Media he is now utilising his knowledge and experience with his rapidly increasing client portfolio to help them achieve their business goals.