When it comes to building a nest egg for the future, property is still regarded as one of the safest long-term investments.
While some investors may want to buy a property and rent it out straight away, others may choose to live in the home while they renovate it. Investing in property can be a great way to create wealth, but there are some golden rules to consider before taking the plunge into property investment.
Know your budget
Before investing in property it’s vital to have a thorough understanding of your cash flow. Ask your bank for a pre-approval of your investment loan, so you will know how much you’re able to borrow before you start hunting for properties.
Don’t underestimate ongoing costs
Make sure you budget for rates, insurance and general repairs. When you have purchased your ideal investment property do what you can to prevent costly maintenance issues arising, such as replace ageing taps.
Buy in a growth area
Try to choose an investment property in an area where there is strong demand for rental accommodation. Buying a property close to transport, universities and schools will make it more attractive to renters.
Be realistic about your investment goals.
Are you looking for fast capital growth or wanting to hold the property long-term? During boom periods, it’s much easier to renovate properties and turn them over for a quick profit. In slower economic times, it may take many years to achieve the same growth.
Build sweat equity
Paying tradesmen to renovate your investment property is costly. You can save money and increase your profit margin by doing the work yourself.
Look for liveable not luxury
Remember a rental property only has to be clean and functional. Don’t get sucked into buying a property simply because it has a stylish interior.
Buy with your head not your heart
When house hunting it’s very easy to get caught up in emotions. While a home on a steep block may have a stunning view, it could be a nightmare to renovate due to retaining or excavation costs. Be sure you weigh up the pros and cons.
Negative gearing is a practice whereby an investor borrows money to acquire an income-producing investment property and expects the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments).
The arrangement is a form of financial leverage. The investor may enter into such an arrangement and expect the tax benefits (if any) and the capital gain on the investment, when the investment is ultimately disposed of, to exceed the accumulated losses of holding the investment.
If your repayments on the investment loan won’t be fully covered by the rent, your property will be negatively geared. While this can have tax advantages, it can lead to financial stress if you don’t have enough cash flow to cover the loan repayments, rates or body corporate fees, so consider your budget carefully before buying.