Are you ready for an investment property?

Property can be a fantastic way to invest in your own future, but it also comes with risks. If you're thinking of buying an investment property, here are the questions you need to ask yourself before you take the plunge.

With the market operating in ebbs and flows, real estate can be one of the best long-term strategies to invest your money. However, the old adage 'safe as houses' isn't always true, as there are some risks involved with purchasing an investment property. 

Simon Pressley, Head of Property Research and Managing Director of Propertyology says you shouldn't go into property ownership lightly, and shares the questions you need to ask yourself before taking on the responsibility of a landlord.

What associated costs will I need to factor in aside from purchase price, and how much am I looking at?

"Stamp duty is the biggest cost, along with buyer’s agent and research fees' Simon says.

"Other costs include conveyancing, searches, building and pest inspections. As a very general rule of thumb, total acquisitions costs equate to $25,000 for a $450,000 property purchase."

How much cash or equity will I potentially need for an entry-level investment?

"We believe the sweet spot for investors are properties worth $280,000 to no more than $500,000. Banks typically lend up to 90 per cent of the purchase price (with mortgage insurance approval)," he explains.

"Those who already have equity in property often elect to leverage against the equity, essentially borrowing 100 per cent of the funds required to complete a purchase."

How can I make myself look like a great customer to a bank?

Simon reveals, "Banks place a lot of value on a borrower’s financial character, this means their track record of paying everything on or before its due date, along with showing discipline to save and/or put extra payments off existing debts."

"Responsible lending also requires banks to be confident with the stability of a borrower’s income. Recent changes within the banking industry now require borrowers to complete a thorough budget exercise, with banks verifying budget expenses against transactions listed in your bank statements and credit cards," he says.

How can I plan for unexpected or unfavourable circumstances?

"Banks will stress test a borrower’s ability to meet all expenses but, at the end of the day, the borrower is the one responsible," explains Simon.

"Propertyology believes that it’s good practice for investors to prepare a property budget that makes an allowance for rental income being received for 48 out of 52 weeks and to factor in a few interest rate rises." 

Simon also believes it's a good idea to have a contingency fund of around $5,000 set aside just in case you need to replace a stove or hot water system.

How long should I be prepared to commit to an investment property for?

"While some people trade shares as frequently as daily, property really is a long-term game because it costs too much to get in and out," explains Simon.

He suggests holding onto your investment for ten or more years. "It’s also important that investors appreciate that growth cycles (double-digit years) occur at different times in different cities. Large parts of Australia haven’t experienced a growth cycle for more than ten years, but their time in the sun is about to occur," he says.

Do I have the right mindset for investing in property?

"The key to making good property investment decisions is to not get obsessed with the bricks and mortar and neighbourhood features like schools and shops," says Simon.

"View property as a commodity and remember that your ‘market’ consists of eight capital cities and 170 non-capitals across this huge country. It is highly unlikely that the best opportunity is within your neighbourhood," he advises. Take yourself out of the sale and you'll be set!

For more investment strategies and property advice, tune into Scott McGillivray's Buyers Bootcamp, 9.30pm Thursdays on Lifestyle HOME.

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