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Understanding the PROPERTY INVESTMENT Process
Investing in property is often seen as one of the best ways to create wealth in Australia. However, if you are a first-time investor, knowing where to start and what to consider, so you make smart decisions, can be overwhelming.
Equally, if you are a seasoned investor, knowing how to maximise your investment and position it for success can be just as challenging. Let us guide you through each step.
WHAT ARE THE STEPS TO INVESTING IN PROPERTY?
TWO PRIMARY WAYS TO STRUCTURE AN INVESTMENT
OPTION 1 | Positive cash flow property
This is an investment property where income (usually derived from rent) is greater than the sum of all the expenses of the property. Effectively, you are receiving more rent each cycle than you are paying in expenses.
In this structure, each property pays for itself and can provide investors with additional equity and the opportunity to then purchase other investments.
OPTION 2 | Negative cash flow property
A negative cash flow property, or what is often called a negatively geared property, is when your income is less than the sum of all your expenses – or in other words, the rent does not cover all of your costs.
This structure can offer a number of tax benefits in the form of tax deductions and is popular among investors that are making the most of capital gains. Your investment strategy will depend on your income and it is very important to talk to your accountant about the right structure for you.
WHAT IS A PROPERTY CYCLE AND WHAT DOES IT MEAN TO ME?
You are most probably familiar with the term ‘property cycle’, but may not know exactly what it is, what factors influence the cycle and what it means when investing.
Property cycles are controlled by two competing forces. Supply (the number of properties for sale) and demand (the number of people looking / able to buy a property). If demand exceeds supply, property prices will increase, whether that be in terms of house sale or rent prices. If new supply comes into the market and exceeds demand, then prices will fall.
But what causes different markets to fluctuate?
As our population grows, demand also increases for properties – both for rental and home owners. As people start to buy and rent properties, the value of property slowly increases – the simple forces of supply and demand.
At the same time, developers and builders start building new properties to put on the market, savvy investors and homeowners looking to capitalise on the price rise also list their property for sale. This leads to an oversupply of dwellings, which eventually results in slumping home values and rent reductions.
WHAT ARE THE COSTS OF INVESTING IN PROPERTY?
Whilst an investment property, when chosen carefully, can provide solid financial returns, it can also be an expensive asset to acquire and maintain.
To ensure you are not hit with any nasty surprises, being prepared for the major upfront and ongoing costs is a smart decision. It is also worth talking to your accountant about which of these expenses can be claimed through tax. For example:
- Purchase costs
- Loan establishment fees
- Mortgage insurance
- Purchase of whitegoods or appliances
- Utility connections
- Stamp duty
- Conveyancing and legal fees
- Interest on the loan
- Building and landlord insurance
- Strata fees
- Land tax
- Council Rates
- All property management fees
- Property maintenance costs
- Accountancy fees
hOW CAN i FIND THE RIGHT PROPERTY INVESTMENT AND ADD VALUE?
Buying a well located property investment is a key ingredient to investment success. Here is a look at some of the key neighbourhood and property features you should look for and where to add value.
NEIGHBOURHOOD FEATURES TO LOOK FOR WHEN BUYING AN INVESTMENT
We have previously touched on the importance of understanding property cycles and how demand plays a key role. One of the key influences on demand for an investment property is its location.
Good locations will always be in demand for both renters and buyers, so spending time assessing and finding the best location can make a big difference in the long run.
Here are 10 neighbourhood features to look for:
- Close to public transport
- Access to amenities such as pools and play areas
- Proximity to lifestyle features such as coffee shops, bars etc.
- An area on the brink of transformation by urban renewal, gentrification or improved infrastructure
- Heritage neighbourhood with period architecture
- Close proximity to good schools
- An area with a low crime rate
- Close to, but not right next door to amenities such as transport hubs, freeways, medical centres etc.
- Neighbourhoods with established trees
- Within 10km radius of a major city
SEVEN THINGS TO CONSIDER WHEN FINDING AN INVESTMENT PROPERTY
TIP 1 | invest in an area you know
Make sure you thoroughly research the area you are considering investing in. Ensure you are across the area's demographics, infrastructure plans, the capital grow rate of the area and more.
TIP 2 | low maintenance and sought after properties
TIP 3 | what are the future plans for the area?
Are there any planned upgrades in the neighbourhood? Is it on the brink of transformation by urban renewal, gentrification or improved infrastructure? These can be good signs of potential future growth of an area.
The local council is a good source of any future projects. Be careful that the future plans are not to support an area that has already boomed. Also beware of oversupply of apartments, as this can dilute demand and therefore the long-term value of the property.
TIP 4 | Does it offer the right returns?
Spending time doing your financial due diligence is important to ensure you are making the right decision. Assess the expected purchase price, rental income, interest rates and repayments to determine how much you could potentially make on the investment. Talking your accountant or financial advisor is recommended.
TIP 5 | strata title? have you assessed the pros and cons?
If the property you are looking at is on a strata title, you will own a portion of the property. Normally this would include the apartment and parking, combined with shared ownership for the remainder of the common areas.
As an owner of a strata property, you are required to pay strata fees or levies, which cover the maintenance costs of the shared or common areas in the building. It is important to understand the impact of this phase on your budget.
TIP 6 | Look for areas with a low vacancy rate
Review vacancy rates to find an area with strong demand. Low vacancy rates may imply that a rental property will not sit empty for long - which is important for investors.
TIP 7 | What do tenants want?
HOW CAN I ADD VALUE TO MY INVESTMENT?
- Build a carport
- New curtains and blinds
- Install a skylight
- Replace light fittings
- Put in a BBQ
- Steam clean carpets
- Sand the floorboards
- Replace door handles and knobs
- Install a dishwasher
- Install air-conditioning
- Install built in wardrobes
- Consider allowing pets
- Add new appliances
HOW TO REACH AND ATTRACT THE BEST TENANTS
Finding and retaining good tenants is a key ingredient for your investment success. With the right tenants, you are more likely to receive rent on time and have the property looked after. These benefits are vital for an investor.
Plus, when you consider how much revenue you will miss if an investment is sitting vacant for a week, a fortnight, a month – you will clearly understand the importance of finding and retaining good tenants.
Here are some features that are popular with tenants:
- A good location
- A good quality kitchen
- Air conditioning / heating
- Good quality fixtures and appliances
- Good quality blinds, shutters or curtains
- Good internet connection
- Pet friendly
- A usable outdoor area
- Good storage options
- Longer lease such as 12 months
WHAT TO THINK ABOUT WHEN RENTING OUT MY HOME
Not all landlords are focused on driving rental return and maximising their investment. There’s a whole sub-segment of landlords who are renting out their home due to work or family scenarios.
These landlords are often more interested in finding tenants that take care of their property, rather than being purely focused on maximising their rental return. While some investors are tempted to manage their own property, having a local, dedicated property manager to look after your home is often a smarter decision as:
- They have a better idea of pricing
- They understand the rental market, what tenants are looking for and its overall demand
- They will thoroughly screen all renters
- They will manage any issues, including maintenance issues
- They will help ensure your rent is paid on time
- They will stay up to date with changing local legislation
- They will conduct regular inspections to ensure your property is being looked after
- They will negotiate any rent changes on your behalf
All of these tasks are difficult to manage, if you are not local.
What is the role of a property manager?
A key to a successful investment is having good tenants who pay their rent on time and look after the property.
Once a landlord encounters a problem tenant, owning and managing a rental property becomes difficult and time consuming. A property manager is your skilled partner who takes care of your property and your tenants.
An experienced property manager can help save landlords a significant amount of time and money and make owning a rental property more rewarding.
A property manager is responsible for:
- Dealing with the numerous day-to-day tenant demands
- Advertising your property for rent
- Hosting open homes
- Finding and screening tenants
- Managing the on-going reporting process
- Managing the lease sign-up process
- Managing budgets and financial records
- Managing regular inspections to ensure your property is being looked after it
- Managing the rent, including setting, adjusting and collecting
- Handling emergencies, complaints, evictions and other issues
- Knowing specific local landlord-tenant laws and looking after the tenant
WHAT ARE THE BENEFITS OF USING A PROPERTY MANAGER?
With over 30,000 properties under management across our network, we have seen the true value a property manager offers an investor.
They help ensure:
- You get your time back as they deal with the numerous day-to-day tenant requests
- Less stress, as someone else is managing your property
- Your property adheres to strict legislative requirements and they stay up to date on any changes
- You are eligible for more comprehensive insurance cover
- Happy tenants and less tenant turnover
- Regular communication and updates on your property
- Fewer problem tenants due to a thorough screening process and reference checking
- Improve cashflow through consistent rent collection and systems to enforce penalties
- Manage outgoings through proactive issue management
- Streamline tax time through accurate budget management
- Maximise rental returns by adjusting price to local market value
And remember, property management fees are tax deductible.
WHY SHOULD I HAVE A RENTAL APPRAISAL?
As an investor, you want to ensure you are maximising your rental returns.
You should be asking your property manager these questions each year when they conduct a rental appraisal:
- When is the appropriate time for a rental appraisal?
- How much rent should you be charging to be competitive in your local market?
- How do you know what tenants are looking for?
- How can you add value and appeal to your investment?
Your property manager undoubtedly oversees a number of similar properties in your area and is, therefore, a local specialist.
Having an annual rental appraisal is an important step to ensuring you are maximising your rental returns.
01Get a rental appraisalAre you looking to maximise the potential of property investment? Get a free rental appraisal with a local McGrath Property Manager.
02DOWNLOAD OUR MAXIMISING YOUR INVESTMENT PROPERTY'S POTENTIAL GUIDEA key goal for all investors is undoubtedly to maximise returns, but you may be unsure how to achieve this. This guide has been created to help both new and experienced investors ensure they have the right knowledge to set themselves up for success.
01Buying an investment
02Finding the right property investment
03The role of a property manager