Buying an investment property can be an effective strategy for creating wealth and protecting your future. It can help improve cash flow, offers tax benefits, and is considered to be more stable than other investments.
Many Australians do not take the first step in buying an investment property, thinking it is prohibitive and completely out of reach. According to the Australian tax office, 39% of all people with real estate investments earn less than $ 50,000 annually and 73% earn less than $ 100,000 annually. in their normal daily work.
How to Invest in Property – What you need to consider
Real estate may be a less volatile investment, but it is not without risk. It takes detailed planning, research, knowledge and, most importantly, the right people behind you. There are a number of factors that will influence your decision to purchase an investment property. Let’s take a look at some to put at the top of your list.
1. Review your personal cash flow and budget | Know your goals
Knowing your real estate investment goals and goal setting is an important aspect of real estate investing. Your investment goals may differ, but you need to understand why you want to invest in real estate? It is important to be clear about this and speak to experts such as your accountant and financial advisor. Imagine the following situation:
- Do you want to have passive income in the future?
- Do you want to use the investment property as a vehicle to create equity to pay for your home?
- Do you want to become the owner of an apartment building or develop a portfolio of 10?
- If you want to retire
- How much income do you need to retire
- What you can achieve with your current salary
An important step is to understand the amount of money required to invest in real estate and whether you can afford the cash flow impact of owning an investment property. This can be as simple as listing all of your assets, including income, and calculating your expenses.
Calculate how much you have as a down payment (make sure you don’t put too much effort into it) or how much you need to save for a down payment. Normally a lender wants you to have a 20% down payment.
2. Know Your Finances. Pre-Approval and using a Mortgage Broker
The next step is understanding your financial capacity and if the goals you have set are possible now, or what needs to change, financially, to make them feasible in the future. An investment property can be purchased outright using cash or more commonly purchased using a loan, known as a mortgage. If you like many other Australian’s will be using a mortgage to service the repayments for the investment property, you will need to work out your borrowing capacity from the bank.
Yes, there are many online calculators available, but to get an accurate credit metric that takes into account your goals and objectives, we recommend talking to your mortgage broker. You can also arrange a pre-approval, this is an indicative approval of the amount you can borrow.
This gives you an affordable price range depending on your financial situation. It is recommended to get pre-approved for an amount so that you can search for a property with certainty based on the amount you have to spend. It also determines where you can buy and what type of property you can buy, eg. a house or an apartment, new or old. You should also consider how to structure your loan, should it be interest only or principal and interest? Should you fix the payments on a fixed term, leave them variable or do it 50/50? The answers to these questions may depend on the particular economic environment. As always, seek professional advice before committing!
3. Talk to your accountant
You need to understand the tax implications of buying an investment property, and your accountant is the best person to talk to. Ask them to clarify the following:
- Impact on negative gearing and depreciation on new builds. They can advise you whether it is better to buy in a new or old building
- If you are buying a property with someone else, ask whose name should be on the contract, as this may affect future tax benefits, property tax and stamp duty.
- How much you think you can spend each week on an investment mortgage and the tax implications of that amount.
Buying real estate through a trust has become an increasingly popular consideration as part of an investment strategy as it can provide excellent tax benefits and asset protection. There are a number of factors. For instance:
- if you buy an investment property through a family trust, you cannot deduct the capital losses from the taxable income.
- there are no land tax thresholds in some states
4. Find a conveyancer or lawyer
Most real estate investors use the services of a trustee or attorney to manage the buying process on their behalf. Although you can act independently when buying a property, the documentation and accounting process can be complicated – and seem daunting. The assistance and assistance of a qualified professional who knows the legal documents and laws can facilitate the process.
5. Find The Right Market and Property
Once you have your finances in order and understand what you hope to achieve, you need to start looking for the right real estate investment. This step is critical to securing the best opportunity for capital appreciation and strong rental returns for your real estate investment. It is important to understand the underlying fundamentals that drive real estate growth, at the macro and micro levels.
To do this, it is necessary to classify the key investment criteria as:
- should it be close to public transport, schools, shops, work and what is the walking distance?
- What is important to you in terms of the outside and inside of the investment?
- Type of building, size of complex, parking, number of bedrooms and bathrooms, flooring, appearance of properties, quality of kitchen, backyard and outdoor entertaining and,
- whether you want to renovate or not
These steps will help you clarify exactly what you are looking for and allow you to evaluate potential real estate investments against your must-have criteria. Choosing the right first home is crucial as it will be the foundation of your real estate portfolio.
ATO data shows that a large 71% of investors in the real estate market own only one property and only 10% of investors own more than two. This is due to many factors, but usually it is because the wrong property was selected that prevented the buyer from continuing to build their portfolio, due to little or no capital appreciation or poor rental yields.
6. Do you engage a Property Manager or self-manage?
After purchasing your investment property, the next important decision you need to make is whether to hire a property manager to help you or manage it yourself.
While many investors are financially savvy, they are in the dark when it comes to finding tenants, solving day-to-day real estate issues or legalese. An experienced property manager can help ensure you receive a reliable stream of income, excellent capital growth and the best possible returns – plus the guarantee of exceptional customer service. You will receive regular and thorough property inspection reports, copies of all important documents and regularly check rental prices and the local market to help you get the best result.
A property manager will cost around 7-10% of your total rental income, but the services and expertise of a good property manager are worth far more than that fee and in many cases the agent’s service fee is tax deductible. Your property manager keeps track of your monthly income and expenses and can provide you with a report for your year-end accounting. There are some other accounting implications and requirements, so be sure to discuss these with your accountant.
These are some of the most important considerations when considering investing in real estate. For more information on structuring and asset protection, we recommend that you seek advice from your accountant or financial planner.