Is property investment for me?
Property investment continues to be popular in Australia and it is not hard to understand why. A property investment can be a way to financial security in retirement or provide your children with a foothold on the property ladder. But investment also brings with it risks. How do you know if you are in a position to invest? What do you need to know before you buy? If you are curious about this and what leads to successful property investment in Australia, the following tips provide a broad overview of what you need to know.
Do due diligence
Any investment requires planning and preparation; because of the costs involved this is especially true of property investment. Check each step of the way with thorough research. Ask for advice but always qualify information yourself, ultimately you will bear the cost of mistakes.
Set your financial goals
This is another essential part of investment. Firstly, you need to have a clear indication of why you are investing in property in the first place. Is it a retirement plan or something more short term? Is it for your own benefit or is it to assist your children? Knowing when you want to achieve your investment goals will help with planning to reach them. Your investment goals will be set to your own risk profile and depend on your own personal attitude toward risk. It is important that you determine this to ensure that the investment does not cause stress or worry.
You also need to establish your current position. You need to know your assets, income and expenditure and what that will allow you to borrow for investment. Once you have a clear picture of this, you need to be sure you are able to maintain a budget that will support any repayments on the investment. This does not have to be a dire situation; most people find they are able to modify spending to find extra savings. Also keep in mind that your tenants are helping you topay your mortgage as you sit and watch your investment improve in value.
The size of the initial deposit will be the most significant consideration. Most experts consider 20% the minimum deposit needed, but it is possible to purchase property with as little as a 5% deposit. However, this will attract further costs for Lender’s Mortgage Insurance (LMI). Other associated costs include stamp duty and legal fees. You need to be sure of all these costs before committing to an investment purchase.
Know the taxes
Property investment brings both bad and good news with regard to taxes. Initially, you need to pay stamp duty on the property purchase (around 2 – 3% of the price of the property; depending on which state you are buying in). This has to be paid at the time of the purchase and some people choose to add this cost to the amount of money they are borrowing. While this pays for the tax, you then pay interest on the extra amount you have added to your loan.
Council rates are another form of property tax which must be paid annually. Payment can be in one lump sum or spread across quarterly payments. This payment will also cover garbage collection and other municipal charges.
There is also anannual land tax if you have substantial property holdings (the threshold in Victoria is $2500000). While this may not effect a single property purchase it is worthwhile checking out details before making a purchase.
The good news with regard to tax is that there are a range of tax deductible expenses which your investment property will generate. These can help reduce your tax bills as well as improving cash flow. An investment property is negatively geared if the income from the rent is less than the interest paid on the funds borrowed. This negative gearing allows you to offset any loss in the expense of owning and maintaining an investment property against any income you earn. This allows you to use the tax system to bear the brunt of the short term losses of the property investment.
Location, location, location
It is important that your purchase is located in a desirable neighbourhood. The location should also include easy access to public transport or parking, shops & restaurants, schools and recreation area, such as parks and beaches. All these considerations determine the market value of your property and how much it will increase in value. The demographics of the area are another important consideration in whether the area is desirable to tenants.
An investment property needs to be an area with a strong rental market, which is essentially determined by supply and demand. You want to look for an area with a low vacancy rate (ideally below 3.5%), as this can indicate the area is attractive to renters. Low vacancy rates would also suggest it is unlikely any property will be vacant for a long period.
The location of your property also needs to be in an area where the rental proportion is not too high. Every suburb will have owner occupiers and renters. The proportion of each will determine whether an area is likely to be a good investment. A high proportion of renters will likely mean a larger number of landlords to compete with in the rental market.
There is help
Earlier in this article we mentioned asking for advice. Learning about property investment is a key strategy to success in property investment. And the good news is that if the idea of hunting for a property doesn’t appeal, the thought of having to find tenants gives you nightmares or any of the undertakingsassociated with real estate investing just turns you cold, you don’t have to go it alone. Accrue Real Estate is a well-established, premium property introductory service which will take the stress out of the process. With associates in all the fields related to property investment Accrue Real Estate can help turn your property investment dreams into reality.