7 tips for buying your first rental property

A well managed investment property can provide you with passive income for years to come while your investment makes steady capital gains,  helping you secure financial security in the long term.

And after reading all the landlord success stories, you’ve decided that purchasing a rental property will be your first venture in the property market. 

But when you’re starting out, it can be intimidating to know what you’re looking for.

As with any investment, it's better to be well informed before diving in with hundreds of thousands of dollars. Here are the things you should consider before buying a rental property.

• Always crunch the numbers  — Cash flow is king! 

 Cash flow refers to the movements of money into and out of a business. For rental properties, incoming money comes in the form of rental income. Meanwhile, cash flowing out refers to operating expenses and maintenance costs of the investment property.

It’s a common trend in the early years of owning an investment property that you will incur a small loss because the rental payments will not cover the entire mortgage payment plus the additional costs. As your mortgage payments decrease or stop and the rental income increases, you will eventually break even. However, this process can take some time. 

This is why knowing your cash flow is important. If there will be a shortfall between your rental income and running costs, you need to be sure that you have the money to fill the gap for it before making the commitment.

Be aware of the property taxes and add these into your calculations. Stamp Duty, Capital Gains Tax and Land Tax should also be taken into account.

Before you seal the deal, it’s a good idea to talk to a broker or your accountant to help you work out the cash flow for a prospective rental property. 

• Understand negative gearing  

Negative gearing can offer rental property owners certain tax benefits if the cost of running or maintaining an investment property exceeds the income it produces. 

  One way to maximise your deductions is by claiming depreciation. All the structural elements, fixtures and equipment in your investment property, from carports to carpets and from balconies to blinds, will eventually degrade and need replacing. Depreciation allows you to claim that wear and tear as an annual deduction.

But take note that you can only get a tax benefit if you earn other taxable income in the first place. So, while you are actually making a loss on the property, the advantage is that the loss can be used to lower the amount of tax on your other earnings. However, many experts do advise against buying an investment property just to get a tax deduction.

Listen to our podcast to learn more about depreciation and what it means for you. 

• Location is key

 The last thing any investor wants is to buy a property in an area that tenants will not want to rent in. 

A city or suburb where the population is increasing and economic activity is picking up steam can be a good starting point when looking for where to buy your rental property.  

Look for a location with low property taxes, good local schools and plenty of amenities (parks, shopping centres, restaurants, recreational facilities, etc.) Additionally, an area with low crime rates, good access to public transportation and a burgeoning job market may attract a larger pool of potential renters.

Also remember that you can attract high quality tenants if you are offering space in a prime location. 

• Make sure the property is attractive to renters

Once you’ve nailed down the location where you want to buy, you need to put yourself in your potential tenants’ shoes and think about what the property has to offer. 

When choosing a rental property to purchase, ask yourself if you’d be happy to live in it yourself. And if you are a tenant, ask yourself the things you would want in a property before moving in.  Remember that most tenants don’t plan on staying somewhere forever, and don’t have the same attachment to the place as the property owner.

 In-house amenities, such as a nice kitchen and bathroom, could be a big plus for tenants looking for a place to rent. In highly urbanised areas, such as CBDs in capital cities, parking space is increasingly becoming an important consideration. 

But it’s also important to set boundaries and to differentiate between your own home and your investment. Avoid becoming overly involved; remember it is the home of your tenant and not your own. 

• Find a good property manager

 A property manager is a licenced real estate professional whose main task is to keep things running smoothly for you and your tenants.

But did you know you can get a helping hand from a property manager before you have even purchased your property? A good property manager can help tell you what kinds of property tenants are looking for, where the best locations are and what rental demand to expect.

They can also give you the rundown on what to expect as a landlord. The property manager should be able to give you advice on property law, your rights and responsibilities as a landlord, as well as those of the tenant. 

When you’ve purchased a rental property and there are tenants already installed, property managers will also take care of any maintenance issues. A good property manager will also advise you when to review your rents and when you should not. 

 If you’re worried about the cost of working with a property manager, don’t worry. The cost you pay to your property management is usually a percentage of the rent paid, is deducted from the rent and is tax deductible. 

 And while a good property manager will free you from tasks mentioned, you should take it upon yourself to make regular independent inspections of your property to make sure that your investment is being properly managed. As a courtesy, make sure to give notice to your agent, as well as your tenants. 

• Check the condition, age of the property and its facilities

A rental property that needs plenty of maintenance can eat away at your profit and your bank balance. Also, you will not want to spend every other weekend at your property overseeing repairs and your tenants probably don’t want you there either. 

For investors, a brand new property is ideal as it makes it easier to move in and the facilities and equipment will be under warranty for the first few years. 

If you do have a higher maintenance or an older property with signs of wear-and-tear, it’s not all bad news. If you buy property that is not in peak condition, you get the opportunity to improve the value of the property by fixing the place up and this can increase your returns for both capital growth and rental income. 

Contact a professional building inspector before you purchase (and then once a year) to conduct a thorough inspection of the property to find any potential problems. It’s also advisable to connect with a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship.

• Do your due diligence

Before bidding or putting in an offer for a place, do your research. It doesn’t matter if you’ve fallen in love with a certain property or it has been on top of your list for a long time now. The extra time and effort you put in will always be rewarding. 

Some things you tick off your to-do list before signing on the dotted line include:

Getting a building inspection. This process entails assessing the property’s condition and will help you identify anything that needs attention. If possible, get a pest report for a really thorough overview.

Check future developments in the area. Be up-to-date with the latest infrastructure projects in the area. By knowing how the real estate market landscape in the area will change, you can make strategic investment decisions. For example, if a new transportation hub is going to be built near a suburb you’ve been eyeing, it could help your property value.

Make sure to check the neighbourhood. No matter how beautiful a property is, a bad neighbor with a hoarding issue or with unruly behaviour (or probably had an altercation with the previous owners) can leave your rental property vacant.