17 Things To Consider When Buying An Investment Property

17 Things To Consider When Buying An Investment Property

Have you watched those current affair shows and wonder how a 48yr old single mother can buy 36 properties in 2 years to have assets over $20,000,000? I’ve often wondered this. This list won’t help you find out how she did it, nor will it tell you what to buy or where to buy. What this list will help you with is give you 17 Things to Consider When Buying An Investment Property. THIS IS NOT FINANCIAL ADVICE, just a comprehensive list of what you need to think about and consider when you are looking to investing in the property market.

Make Sure you Can Afford to Invest – One of the most important things to consider when buying an investment (or any) property is can you afford it? Check all your numbers and look over them several times. Discuss the purchase with your bank, your accountant, your financial advisor. Understand all the costs and understand, as with any investment, their are risks involved. There are lots of different financial calculators online to help you develop your budget, like these from Domain.com.au. Banks also have calculators to help you formulate your budget.

Know the Rental Yield  – The rental yield is the return you will get on your investment (usually calculated over a year). Lots of property sites have a rental yield calculator. Use it to see how the properties you are looking at rate against the average for the area you are looking. For example, if the average in an area is 5% and the property you want is currently renting and showing you could achieve a 6% rental yield then this would be a good property to look into further. Money Magazine has great information on rental yields for different areas. It’s well worth buying the latest copy if you are thinking about investing in property.

See it as a Long Term Investment – If you are trying to make a quick profit from your investment, property probably isn’t the right choice. In most cases real estate is a long term investment and it isn’t easy to get your money out quickly. There are high costs involved with buying and selling a property that will impact on your profit and selling can often take time. Be prepared to be in for the long haul as far as an investment goes.

Do all your Checks and Balances – As with any other property purchase, it is wise to get a property inspection and buy some reports on the property and area so you can see if your investment is sound. Take some time to evaluate what you are buying as it is your money. Also, if you are not an citizen of the country, you will need to look into Foreign Investment Rules before you start you search.

Negative, Neutral or Positive Gearing? – You should consider if it is better for you to have a property that is negatively, neutrally or positively geared. In very basic terms negative gearing is when the rent you receive from the property is less than your costs on the property while with a positively geared property, your rent covers all your costs and you have funds left over. Each has financial pros and cons so it is best to discuss all your options with your tax accountant or financial planner.

Don’t Become Emotionally Attached –Keep remembering that this is not a property you are going to live in and the most important thing is to find a property that will rent easily and make you money. It is better not to pay more for a property than its worth just because you love the antique fire place. Take the emotion out of the equation and look at the numbers. If you find a property that is ugly but all the numbers add up, don’t discount it.

Factor in All Your Costs – When you are the owner of an investment property, apart from loan repayments (if you borrow) there are other costs involved. If you have a real estate agent managing the property for you, you will need to pay them for finding you a tenant as well as an ongoing percentage of your rent (can be around 4% to 8% depending on the agent). You will also need to pay the council rates or strata fees on the property and water rates as well as many repairs that are needed on the property over time. Develop a realistic budget and see if that fits with your investment strategy.

Should an Agent Manage the Property? – An agent will cost you a percentage of your monthly rent but they will also manage the property. They will screen and find a potential tenant for you as well as doing background checks on them. They will also do regular (usually 1 or 2 a year) checks of your property and provide feedback. You can even get them to arrange for tradesmen and take the cost out of the rent, when required. If you want to use an agent, look around. See if they manage any other properties in the area, compare their costs and why you feel you can trust. You also don’t have to choose the same agent that sold you the property although they may give you a discount on your monthly management fee if that is the case.

Consider Landlord Insurance – If you are borrowing money to purchase the property, the financial institution may insist on landlord insurance. It will generally cover you against property damage and loss of rental income. Do some research to find a policy that suits you and read the fine print as to what they cover and what you can claim. An investment property is a big investment that you are allowing someone who you don’t know to live in, so consider covering your investment.

Choose the Right Type of Property – You can purchase a home in the city or in country. You can choose to purchase an apartment that is older, a few years old new or off the plan. You can choose to buy a residential, Defence Force or commercial property. Each has pros and cons. If you want to buy a particular style of property, do research and find out what financial benefits are available. Talk to anyone you know who might have this type of investment and find out the best points and worst points are. Reading property magazines is another good way to find out about different properties.

Location, Location, Location – This consideration rings true if you are planning to live in the property you are buying or not. What are the growth prospects for the location you are choosing? Money Magazine has a section every month that can give you information on how a suburb is performing. Other factors that relate to location, in particular for renters, is its proximity to public transport, schools and work. Put your shoes into the renters shoes and think about what would attract them to that property.

You Don’t Have to Buy your Home First – If you have not been able to get into the property market via your own home (especially in Sydney and Melbourne) you could consider an investment property first. You might be able to manage the repayments if you have a tenant helping you with the monthly payment amount. Do consider that you may not get a renter for a while and you will need to cover all loan repayments during this time.

How Much Maintenance is Involved? – Remember that you will be responsible for many maintenance cost on the property you purchase. Tenants may not be as caring for your newly laid white wool carpets or the spectacular lead lighting in the hallway. Consider purchasing a property that has inexpensive blinds and carpets. If you do renovations to a property before you rent it out, look at fittings that wear well rather than high end costly fitting that will easily break and cost a lot to fix or replace. It helps again here to keep emotions out of the equation. It is often a romantic notion to take a property and fix it up and make it look beautiful but if there are working vertical blinds up, don’t change them simply because you like plantation shutters. Investments work best when you get more back than what you put in.

Choose Your Timing – When you are purchasing any property, timing is crucial but it is often more crucial when the only reason you are shopping is to make money. As the saying goes, ‘Buy in gloom and sell in boom’ (if you want to sell at all). Winter and Christmas times are also good as there are less people looking but this may also mean there are less properties on the market to choose from. Don’t expect the process to be a quick one. Do research, see what is happening in a suburb and in the whole market and plan your attack so you can get a great price.

Do You Plan to ‘Flip’ the Property? – If you are looking to buy a property and then quickly do it up and sell for a better price then do lots and lots of research and planning. The real key to Flipping a property is doing it quickly. Firstly you need to search for the right property. Look for potential and little faults. Make sure you can get council approval for any property you choose before you buy. Keep tight control over your budget and stay on top of all work being done. Have a really good plan! Again, don’t get emotions involved. Don’t pick a $10,000 kitchen bench if it’s not going to benefit the end price of the property. There is lots of information online and on TV property shows to give you an idea of what is involved. Most importantly, know what your budget is and stick to it. The aim is to Make Money!

Factor in Varying Interest Rates – It is important that when you do your calculations and plan for buying a property you consider that interest rates are fluid and have the potential to change over time. When you do a budget don’t just calculate your loan repayment on todays low rates as they will eventually move up and you need to make sure you can cover repayments under all financial circumstances. Calculate a few scenarios.

You Don’t Need to go to the Same Bank as Your Home Loan – Shop around and look for the best loan to suit your needs. There are 100’s of financial institutions out there all trying to get business so go online or visit a mortgage broker to see what your options are.


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  • Tags: 17 things to consider when buying an investment property, thinking of buying an investment property, investing in real estate, making money through real estate, what to consider in buying real estate


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