3 simple steps to investing in property
Getting your next property need not be a complicated exercise.
Blogger: Lachlan Walker, Place Advisory
There’s a lot that has to be taken into account when it comes to property investment. While some things seem obvious, chances are there are certain elements you haven’t even thought about. This week I will provide an overview of the elements required for property investment – in just three steps.
Step 1: Choosing your property
The area you choose to buy is a crucial element of property investment. It determines if your investment will be a successful one and potentially pave the way for future endeavours and, hopefully, your retirement. Investment growth is dependent on three factors:
- Population growth
- Infrastructure and government investment
- Employment opportunities and diversity
These markets have a synergetic relationship – with population growth comes increased infrastructure and more employment opportunities, and vice versa. Basically, it comes down to common sense. The investor only needs to think about what they look for in an area in order to understand what will be desirable to a prospective tenant. As revealed in Place Advisory’s Annual Investor survey, public transport, proximity to the CBD, retail and entertainment, employment opportunities and proximity to parks and walkways were the most desirable traits when purchasing an investment property in 2014. If an area possesses all these elements, you can expect consistently strong rental yields, and steady, long-term capital growth.
The next thing to decide is whether you want to buy an old or a new property. While a new property may not resonate with you in the same way as an older dwelling, new is the best way to go when you’re buying as an investment. Newer properties are more efficiently designed with higher quality fixtures and fittings – not to mention the tax benefits! While new dwellings do cost more, the numbers stack up – feedback from property managers suggests that a new property is likely to achieve a 20 per cent premium for rent than an older property in the same area. Potential tenants will like the new appliances, new carpets and new kitchens that come with a new property, and will be willing to pay more for it!
Step 2: Paying for your property
Once you have chosen the property you want to buy, the next step is payment. Before you take the plunge, it is wise to obtain an accurate cash flow analysis for the property you have set your sights on. Basically, you as an investor want to avoid using your own money to pay off your property. In an ideal situation, your property will be cash flow positive, meaning that your rent and tax deductions will cover your loan repayments, without you having to dip into your own pocket. The majority of companies who specialise in providing advice on investment properties enlist state of the art software to determine whether a property will be positively geared. This raw, numerical data will give you an opportunity to see black and white results, meaning that a purchase decision will be based on accurate facts, as opposed to a gut feeling of what makes a good investment.
Depreciation is another major element to take into account when financing an investment property. This allows investors to claim a tax deduction for investment-related costs over time, which can save you thousands of dollars in tax on your investment property each year. This will essentially reduce your taxable income, meaning you pay less tax and will save money. To take advantage of depreciation, it is vital to enlist the services of a qualified quantity surveyor to make a professional depreciation report based on construction costs.
Your professional advisors should be your first point of call when it comes to paying for your property. Firstly, see your accountant. They will do an initial review of your finances, allowing you to maximise the allowable tax deductions related to the purchase of an investment property. Next, see a financial planner (in some cases these two will be one and the same). A good financial planner will help you identify goals and set an overall financial strategy to help you reach them. When it comes to obtaining finance, the mortgage broker is the next stop. This is the person within a financial institution who will loan you the money to buy your property. It is crucial that the sale of the property is not finalised until the lender has given formal approval that a loan will be made. Your lender is required to detail all the conditions of the loan which will need to be met before you can be lent the money. A buyer can choose to borrow money through their own bank, or through a mortgage broker. Theoretically, a mortgage broker is able to source the best loan for the borrower as they can assess each individual’s situation and determine what is the most suited. In contrast, individual lenders can only offer their own products – they won’t tell you if another bank has a better product than they do.
Step 3: Maintaining your property
Once you’ve chosen and purchased your investment property (congratulations – those two steps are the hardest, and sometimes the hardest to commit to!) you now need to focus on maintaining it. Employing a good property manager is the best way to enjoy your investment property from a distance as a true hands-off investment. A capable property manager will be responsible for ensuring that your investment property lives up to the returns projected. This will be done by screening all potential tenants, ensuring only those who are best suited will be allowed to live in your property. Your property manager will take care of all the jobs you would prefer not to do, like chasing tenants up for rent, conducting consistent routine inspections, maintenance issues, and all leasing aspects. Employing a professional to manage your investment is crucial to ensuring that every element of your property is under control.
Investing in property can sometimes be seen as a very daunting task, and for some, a very distant reality. The truth is however, if you surround yourself with the right team, experts in their fields, property investment can be made easy. At the end of the day, the property market is cyclical, relatively liquid, stable and tangible and provides the gateway to many people’s financial freedom.
About Lachlan Walker
Lachlan Walker is head of the Place Advisory division at Place Projects, Brisbane’s premiere project marketing company. Lachlan is recognised as one of Queensland’s pre-eminent residential property market experts, specialising in South East Queensland residential property.
His role is to provide product specific advice to clients by gathering and applying internal and external market intelligence that is translated into meaningful market reports. He is widely published and is continually called upon to provide commentary on the residential market by various media and property journalists nationally.
Lachlan has extensive experience in property market research and has provided professional consultancy and advisory services to leading property clients including the likes of Leighton Properties, Lend Lease, Watpac, FKP, Brisbane Housing Company and Consolidated Properties.
Visit www.placeprojects.com.au for more information.