7 Things to Know Before Buying an Investment Property
The statistics say it all-around 92% of Australians who invest in property never make it past their first or second investment.
This is in spite of the fact that one property will never make you rich…it will never even make for a comfortable retirement when you consider that this stage of your life could represent around twenty to thirty years.
So why do so many investors never make it beyond that initial property?
Quite simply, many of them make the mistake of buying with their heart rather than their head.
They abandon the research required to purchase a property that has the capacity to generate strong long-term capital growth, in favour of a very short-term view.
However, to create a wealth-building property portfolio you must take a long-term perspective, plan to succeed and keep the big picture in mind.
Buying property without first understanding certain key elements of investing is like starting a journey to a new destination without a roadmap.
Property investment should always be approached with a sound strategy in place even before you start looking for the best buy.
Let’s consider the key elements of property investing that you need to know inside and out and the type of investment strategy you should implement in order to ensure success.
1. Why are you investing?
Many people like the idea of investing in property to make money, but this really isn’t a good enough reason to go out there and do it.
You need to consider your long-term goals; do you want to secure your retirement income?
Leave a legacy for your children?
Have the funds to enjoy a certain lifestyle?
Once you determine what your long-term goals are, it is then time to think about how property investment can help you to reach them.
You need to create a timeline for your goals and review your progress on a regular basis to make sure you are on the right track.
2. Buying right
At Metropole, we always aim to secure property as an “investment grade” property for our clients – one that will outperform the averages with regards to capital growth.
And we recognise that 80% of the heavy lifting of a property’s performance comes down to its location.
And then we make sure we buy the right property for that location.
Yet many investors make their main focus on price.
I’ve found many novices and even some experienced investors feel they’ve nabbed a bargain when they negotiate a vendor down by $20,000 off the advertised sale price.
But do they really know the true value of the property?
Only extensive research and sound knowledge of the area, as well as the type of property you’re buying, ensures you will buy right.
Sure, a $20,000 discount might seem like a great outcome, but what if the true value of the property is actually $40,000 less than the asking price?
3. The importance of capital growth
The basis of a good investment strategy is to build a portfolio of properties that will generate good long-term capital growth above and beyond all else.
This is because as your property grows in value, you can then leverage into more property by using that growing equity.
In other words, you can build your portfolio much quicker and add more and more properties over the years.
Since your finance serviceability will only allow you to buy a certain number of properties, meaning you may only ever own three or four properties, it’s important to own the best properties you can – they all have to be working hard for you.
4. Can you add value?
If you can buy an investment that will allow you to “manufacture” some capital growth– by buying right and buying something that needs a bit of a facelift – it’s an added bonus that could mean you can build your portfolio faster.
Being able to see the potential in a tired 1970s apartment or villa unit that others only see bland and boring can give you the winning edge in two ways.
Firstly you can potentially secure the property below its intrinsic value and secondly, with a coat of paint, an update of the kitchen and bathroom, and perhaps some new floor and window coverings, you can not only increase the value but also the rental income.
The key is to avoid money pits that require a lot of structural repairs, as it’s the cosmetic work that adds value, rather than things you can’t see, such as re-wiring and re-plumbing.
5. Your financial capacity
Do you have enough cash flow and or equity to invest in the right type of property?
It’s no good buying something you can afford if it’s in an area that won’t make for a good long-term investment and generate that critical capital growth.
Sure you may only be able to afford to buy in a regional town or outer suburb, but these types of locations are less favourable for property investing than inner-city suburbs because they often lack the more desirable amenities, employment prospects and popularity with tenants that are found in inner-city areas.
So you need to make sure you have the funds to match your ambitions.
And you need some funds in a rainy day buffer account for all those unexpected expenses.
A good mortgage broker who understands property investing can be a great ally.
They can assess your borrowing capacity and help you establish a lending strategy that will enable you to build your portfolio with the right type of loan structure in place.
This is important because structuring your borrowing properly in the first instance can save you a lot of money in the long run.
6. Structure to save
Not only do you need to have the best financial structure in place to meet your property investment goals, you also need to understand how to structure your portfolio to get the most from it.
This is where advice from a good accountant who is experienced in property investment can be invaluable.
There are numerous structures in which you can purchase and hold property, but you should always seek legal and financial advice to make sure the structure you use is appropriate for what you want to achieve.
I have seen many investors just go and buy a property in their own name when they could have saved thousands and enjoyed a variety of tax benefits from using a trust structure or purchasing it in joint names with their spouse.
It is critical to structure your portfolio correctly from the start as changing structures halfway can be a costly exercise.
7. Ask for help
All successful investors know that they can’t do it alone.
They recognise that if they’re the smartest person in their team they’re in trouble.
They understand the importance of seeking advice from properly qualified professionals and delegating.
Ticking all of the above boxes on your own can be a daunting prospect, but if you engage a buyer’s agent to find you the best property for your circumstances, a mortgage broker to organise your finances, an accountant to structure your portfolio, and a property manager to tenant your investment and look after it, you will enjoy the journey more and get the most out of your portfolio.
Including all of these elements in your property investment strategy will greatly increase your chance of success, as well as the prospect of becoming one of the few investors who make it beyond the “one house hump”.
Property investment should be part of a long-term strategy which makes it a more predictable venture and removes the emotion that can lead to poor buying decisions.
You’re more likely to become wealthy by things you say no to, rather than the things you say yes to, and having a strategy will make it easier to make those crucial decisions.
