We are often asked the question – will this property make a good investment, or how do I select the best investment property – but before you go out and become an aspiring landlord, there are a few things you must do first.
Property investment is an expansive topic. We’ll look to cover the topic in detail across a few articles, however we’ll begin by touching on a few areas that every aspiring investor must understand very early on.
Step 1 – Consider why you want to invest.
Before you look at any properties online or attend inspections, the first step to property investing is to understand why you want to invest – and clarifying your purpose.
For many families, building wealth is the main reason. However, there are many different goals, strategies, and ways to invest to achieve incredible results. An investor looking for long-term capital growth may target different properties, and property types, to someone who is looking for immediate passive cash-flow.
Similarly, a time-poor ‘passive’ investor will have a different strategy to someone who prefers to be ‘active’ and hands-on during their journey. Take the time to consider why you want to invest, and your timeframe for the investment.
Step 2 – Research, research and research.
Never buy an investment property on ‘gut-feel’ alone and be extremely wary of any ‘property-spruikers’ who claim to have an opportunity of a lifetime. Anything that appears to be too good to be true, usually is.
Once you have clarified your why and purpose, begin the process of researching properties that align with your strategy.
Research involves understanding what’s happening in the broader real estate market, including where different markets are in their property cycle. This includes factors that can affect the property market including finance and lending, population growth and movements, employment and other economic factors.
Read articles, watch YouTube videos and speak to others who are also interested in property investment.
Research also involves looking at individual suburbs and neighbourhoods, and understanding the key metrics in these areas, including median sales prices, rental yields, auction clearance rates, days on market and vacancy rates.
Remember, education will be an ongoing process throughout your investing journey. Learn about cash-flow management, home loans and tax implications of property investing – and how different property types impact this. Building your knowledge in these areas will give you the confidence needed to make informed decisions throughout your journey.
Step 3 – Understanding your financial situation and the costs involved.
Your household financial situation and monthly cash-flow position will essentially dictate what property you can purchase.
It’s critically important to determine a budget for your household. While budgets may not sound exciting, they are powerful in understanding what surplus income you have to invest with. Whether your household income is $70,000, or $150,000, it’s important to know how much surplus income you have to invest with at the end of each month. Is it $500 or $2,000? As this will make a significant difference.
Make sure you consider all expenses that are incurred in your household throughout the year including food, clothing, transport, utilities, rates, insurances, school fees and entertainment. The Australian Government’s Moneysmart website – https://moneysmart.gov.au – is an excellent resource in helping you create and manage a household budget.
The funds required to invest in property depend on many factors, including the price of the property you are targeting, the expected monthly cash flow, as well as any equity you may have in a property you already own.
To buy a property, you typically will need a 20% deposit to secure a loan for the remainder of the purchase price. For a $600,000 property, the deposit would be $120,000. It’s possible to invest with a deposit of less than 20%, but you may need to pay lender’s mortgage insurance (LMI), an additional cost generally added to your total loan amount (remember, LMI protects the lender in case you default on your loan – LMI does not protect you; the borrower).
You also need the income to support ongoing mortgage repayments and expenses each month. Ideally, this income will come from the property’s monthly rent, but in many instances, there will be a shortfall between your rental income and expenses.
You may be required to contribute some money from your own pocket. You’ll need to have enough surplus income to make up this monthly shortfall. It’s important to be realistic with all expenses up-front when you are working on your budget, so there are no surprises post settlement.
Finally, all these steps must occur before you even start looking for a specific property. We’ll explore how to select an investment property in future topics.
Always seek advice from a trusted professional.
Purchasing and investing in real estate is exciting and when done well, can significantly transform your life. Now is a great time to get started on your property journey, or continue climbing the property ladder, as interest rates are at an all-time low. Our agency is also seeing great quality supply begin to come onto the market, and this is set to continue as we progress through Spring.
To learn more about the benefits of real estate investing and what prices may do long-term, please contact us at One Agency. With One Agency being one of Mildura’s most trusted real estate agencies, we are well placed to provide you with our view of the current market based on our local experience. We’ll thoroughly guide you through the process and help you take advantage of this opportune time in the property market.