Across Australia, property investment is one of the most trusted ways of investing, particularly for long-term returns. If property is part of your financial plan, being well informed is the best way to maximise your investment potential.
Investors are attracted to the property market for a number of reasons, particularly its stability. Property investment also offers a number of financial benefits, including capital growth (the increase in the value of a property from the time of purchase), as well as tax deductions and rental income from tenants.
Before purchasing a property, things to consider are what type of property you wish to purchase, location, financing the investment and managing it over the long term. Given the costs associated with buying, selling and financing a property, many investors choose to hold on to their investments for the long term, in order to maximise capital growth returns and the total amount of rental income generated from the property.
Here are some things to consider when you are ready to purchase an investment property.
Choosing a property
When looking for the right property, location and tenant appeal are two of the most important aspects to consider. It’s important to think about the appeal of the property from a tenant’s perspective, rather than your own. Look for features that will appeal to a range of tenants, such as a second bathroom and easy on-street parking, as well as locations that will attract a variety of people. Renters like convenience, so seek out properties close to public transport and amenities such as schools, shops, parks and hospitals.
Financing an investment property is another key consideration. When you know what you can afford, you can choose a property within a realistic budget.
If you already own a home, you may be able to use the equity in your mortgage as the deposit for a second loan. The best place to start is by talking to a lender or mortgage broker to assess your current financial situation and determine what your borrowing capacity is. It is also worthwhile speaking to your accountant as well, as they can help you to structure a tax plan for your investment property. As a starting point, MoneySmart’s mortgage calculator is a useful tool for working out what you can afford to borrow.
In addition to mortgage repayments (if these aren’t covered entirely by rental income – this is called negative gearing), you will need to pay for the following ongoing costs:
- Council rates
- Body corporate fees (if applicable)
- Ongoing property maintenance and repairs
- Property management fees
It is also a good idea to keep a reserve of cash to ensure you are prepared for periods when the property is vacant between tenants or for renovations.
Managing the property
Once you have purchased an investment property, you will need to maintain it. This can be time consuming, so many investors choose to use a property manager to find tenants, arrange contracts and perform inspections. If you aren’t aware of your rights and responsibilities as a landlord, this is a safe strategy.
To attract and retain good tenants, it is also a good idea to keep on top of maintenance and repairs, as well as updates like replacing carpet, curtains and painting the walls. Tenants prefer properties that are well maintained and will be less likely to look for a new home if they feel the property is being looked after for them.