So you want to buy an investment property? Leading property expert Veronica Morgan shares her expert advice.
Buying your first property is an exciting, yet often daunting, experience. With some careful planning you can get the first purchase right, then have a great foundation for a property portfolio.
But let’s not get ahead of ourselves!
Here are the key things to consider if you're considering taking the plunge.
There are a few elements to this step. Firstly, you will need to have saved a deposit. That’s the hard part!
Then you will need to find out how much you can borrow. My advice is to talk to a mortgage broker who has been in the game for a number of years. A good broker will advise you on your borrowing potential and how best to structure the loan if you are an investor. While you're at it, have a chat to your accountant, because they’ll advise on on how to minimise tax and it’s best to do this at the beginning of the process.
Don’t forget to include the purchasing costs. These can add up to around 5 per cent of the purchase price and include:
- Stamp duty
- Mortgage insurance (if needed)
- Strata report (if you’re buying an apartment or townhouse)
- Building & pest inspection (if you’re buying a house, sometimes also needed with a strata property)
And lastly, you’ll need to work out what repayments you can afford. Your accountant can help you with this too. This last step is critical because with many good investment properties you’ll find the rent doesn’t cover the mortgage and other costs.
It might surprise you to know that the costs associated with owning an investment property can add up to as much as 25 per cent of the rental income. These include outgoings such as:
- Strata levies
- Repairs & maintenance
- Council rates
- Water rates
- Property management fees
- Insurance (property and landlord)
It’s important to note that your mortgage payments are in excess of these costs and down the track you might need to factor in land tax also.
If it all costs so much and the rent doesn’t cover these costs, why do we do it? The answer is CAPITAL GROWTH! This means that you need to focus on buying a property that will increase in value faster than you can save AND at a higher amount per year than it’s costing you to own.
Capital growth offsets your operating “losses” and provides you with options over time. This is one reason why property investment is a long game. Some of these options include:
- Borrow against the equity to buy another investment
- Refinance to reduce repayment costs
- Borrow against the equity to finance a renovation to increase rent
- Sell and pay down debt (if you have more than one property)
- Keep it and enjoy the income
Location Location Location
Where do you buy? The short answer is the best location you can afford! My preference is buying within a 10km radius of either Sydney or Melbourne’s CBDs, while avoiding overdeveloped pockets.
Now, I know that this sounds like an impossible task (because, of course, for many it is) so the way to choose a location is research. There are loads of great podcasts out there (Bryce has a great one called The Property Couch!) and many excellent books (like my free ebook!) that will give you the tools to know how and what to research.
Fundamentally you are looking for locations that offer great lifestyle, easy access to numerous employment opportunities, good infrastructure, where people enjoy decent incomes and there is a sustainable (and ideally growing) population.
When you have worked out your location/s, you need to make sure that your budget will buy a property that will appeal to owner occupiers. Owner occupiers are the people who drive up property values, not investors, so you want to ensure that there’s a good mix of tenants and owners in the area.
Before you buy
Once you find a property, there are two things that are critical that you do before you spend money getting your contract reviewed by a lawyer or conveyancer or ordering strata reports and building inspections.
The first is to get a local property manager to give you an appraisal. Don’t rely on the selling agent! You will need a realistic idea of the rent you can achieve and also ask whether this is the type of property that will rent well to quality tenants. Go back to your cashflow projections and check whether the estimated rent makes the property affordable for you.
The second thing to do is to decide your maximum purchase price. You’ll need to research recent sales in the suburb in order to work out what this one is worth. Deciding your walkaway price before you start negotiating with the agent will help you avoid paying too much.
If those numbers make sense - do the rest of your due diligence, make an offer and seek to seal the deal as soon as possible.
Experienced investors often say that the money is made when you purchase, not when you sell. What they mean is that if you purchase a property that’s a good capital growth performer and you pay the right price, you’ve made a good investment.
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