There are two primary reasons why people invest in property:
- Buy to rent – once you have purchased the property, it is rented out to produce a rental income. Essentially you are looking for a trusty tenant to pay as much of the bond costs as possible that you have in place.
- Buy to re-sell – often referred to as ‘flipping’, if you have an eye for fixer uppers and a passion for renovation, many people find good money in buying properties to fix up and resell for a higher price than the initial price plus cost of renovation.
Both of these are sound investment options if you know what you are doing. Investing in property is a long term strategy, so you will need to be sure that you have the cash flow and funds to maintain your repayments and weather any financial stress down the line. You don’t want to have to sell your investment property until you are ready to do so, and only when market conditions are in your favour. If you falter and buy a dud, you could find yourself in serious financial constraints and horribly out of pocket.
Here are some important considerations when looking to invest in property:
- Know your strategy and invest with that in mind: If you are buying to rent, you need to know what the realistic rental income for the area and type of property is, how much you need to spend on any required repairs or maintenance, commissions due to a rental agent, and then cover your transfer and bond costs, taxes, interest, insurance and so on. You may have some shortfall initially that you need to cover, but over time the property should be giving you a healthy return. Ensuring that you have a steady rental income is important as the cash flow will make keeping the asset more affordable. Also make sure that your property suits the demographics of renters in the area – an open plan family home with a large garden won’t perform in an area close to a university unless you plan on converting it to a student digs!
If you’re buying to flip – renovate and resell – you need to know what your costs are to renovate, what the potential selling price could be based on similar properties in the area. You will also need to take into consideration bond and transfer costs, interest and insurance until you do re-sell, which all impact whether you actually make a profit at the end of the day. Buying to flip will require that you acquire an asset that is well below its market value – typically stressed properties and urgent sales – and for this you need to be patient.
- Make sure you can afford it: Investing in property is a long term strategy, so be sure you can afford any bond repayments and costs over the long term. If the property stands empty while you look for a trustworthy tenant, can you manage the repayments? If your renovations take longer than expected, or the property does not flip as quickly as you had planned, can you carry the costs in the interim? Make sure you factor in costs such as rates and taxes, maintenance and capital gains tax into your budget.
- Get a good rental agent: A rental agent or licensed real estate agent that is experienced in managing rentals is an asset and will go a long way in managing things for you and your tenant. They will thoroughly screen the tenants to ensure they have a good payment record and can afford the rental. Once a good tenant is found, they then also provide advice on contracts, rental rates, your rights and responsibilities as a landlord, sort any maintenance issues and do regular check-ups to ensure that your tenant is looking after your property appropriately.
- Research the area you are buying in thoroughly – Estate agents and bond originators will be able to assist with a roll of all property sales in the area for you to compare against and you can also arrange for an independent valuation to be done if you are unsure. Banks have valuable data on property values in different developments and areas which is helpful in ensuring that you don’t pick the wrong investment property. Estate agents can also assist you with determining the potential for rental income based on other rentals in the area.
Check out the local amenities that would make your property more appealing to tenants or buyers. Are there open stands in the area which could be a hotspot for crime or property developments that could impact the future value of your investment?
- Make the property attractive to renters or buyers: Whether you’re planning to rent the property out or flip it for profit, make the property attractive to whoever is going to live or work there. Stick to neutral colours and keep the bathrooms and kitchens in good condition. A well-kept property will attract better quality tenants, and if you’re reselling, a buyer will more easily be able to see themselves in the property if it does not have your personal signature stamped all over it.
- Get an independent property inspection: Make sure that the investment property you are buying is exactly that, an investment and not a liability. When you’re stretched to the max with deposits, bond and transfer costs, municipal deposits, renovation costs and a growing property portfolio, the last thing you need is unplanned bills to fix hidden defects. When buying to rent, additional unplanned expenses can significantly impact on the viability of the rental return. If you do find a great fixer-upper deal, albeit with a few problems, you won’t end up walking away from a great deal because you overestimate the extent of and cost to fix minor problems.
When it comes to investing in property, the last thing you need is hidden surprises that can eat away at your profits and future returns. Making sure the homework is done by professional property inspectors is the first step towards peace of mind that you’re making the right investment. The next step is transferring the risk of undetected defects to an insurer.
Talk to your insurance broker about the best options for insuring your property