4 tips for first time property investors
Many people assume property investors are rich and carefree. This is far from true, especially for the first-time investor.
First time investors are simply everyday people striving to create a better future for themselves and their families. They aim to buy property, rent it out in the hope that one day, with smart management and capital appreciation, they can use the value in that property to help maintain their living standards into retirement without relying totally on government assistance.
Surely this is a worthy endeavour.
Here are some tips to help with making smarter decisions:
Determine your structure
Start by considering the taxation implications. Each structure such as trusts, superannuation funds, companies or personal names has tax advantages and disadvantages. Before purchasing, consult a good property accountant for structural advice suitable for your circumstances. It can be expensive to change names later.
Know your purpose
Some invest with a long-term view of security and wealth creation, while others are looking for a short turnaround and a quick profit.
Inexperienced investors who attempt a quick turnaround frequently fail. They often buy without enough research or experience, find the costs are higher and the return lower than expected, leading to quick losses rather than gains.
The losses in this sort of venture can come hard, fast and large. In a booming market, many people move into the business of flipping, only to see their profits evaporate when the market turns. If you’re a short-term investor, be careful, do comprehensive research and start small.
Looking for short-term capital gains is more speculation than investment. Good long-term property investment is just that — an investment.
Growth and return
Two factors often mentioned in property investment are capital growth and rental return.
One myth of capital growth is that property prices double every seven years. For example, in 1973 the average house price in Brisbane was $17,500. If house prices had doubled every seven years in 2014 the average price would have been $1,120,000. In fact, it was about half of that.
Many property investment gurus make money from seminars rather than property. If a deal sounds too good to be true, then it probably is. However, when looking for growth, two genuine property investment experts first time-investors should be familiar with are: Margaret Lomas, who wrote 20 Must Ask Questions for Every Property Investor and Terry Ryder, who runs hotspotting.com.au.
When looking at income, the figure most quoted is the gross return—that is, the total rent for the year divided by the purchase price, multiplied by 100 to give a percentage figure.
A property purchased for $500,000 and renting for $500 a week has a return of 5.2 per cent. That is $500 x 52 = $26,000 / $500,000 = .052x 100 = 5.2%.
In 2018, interest rates are at record lows, so the 5.2 per cent return looked attractive.
However, when doing the calculation on an investment purchase, you should underestimate income and overestimate expenses. That way, there won’t be any nasty surprises.
Rather than making your purchasing decision on the gross return, calculate the net return — which takes into account your expenses. For example, if you allow two weeks a year for vacancies, add council rates, body corporate costs, agents’ costs, maintenance and insurance. A 5.2 per cent gross return quickly drops to a less than 4 per cent net return. This doesn’t necessarily make it a bad investment, but at least you’re making your decision on a more realistic number.
Don’t buy on trend
First-time investors should be very wary of buying on an economic trend. For example, the mining boom of the 1990s and early 2000s led many property investors into country towns and regions. While returns and growth were — and there is no other word for it — spectacular, the end of the mining boom saw a significant downturn for residential investments in these areas. The supply of tenants diminished, leading to reduced rental returns; buyers deserted the market, and therefore prices fell significantly.
For first time investors buying a property is an exciting and worthwhile venture. There is something comforting about having an investment in bricks-and-mortar. Just remember, property investment is like all worthwhile investments, it takes research, strategy and planning.