You have decided to buy an investment property. The idea of having a nest egg that is earning income weekly and appreciating in value is very appealing but before you go ahead and take the plunge you need to consider a couple of factors. These ideas are designed to assist you in determining the sort of property best suited to your needs.
1. What are your goals?
Before you start you need to have a good idea of what you want to achieve from your investment. Like building a house, if you don’t have a plan you don’t know what you will end up with.
You maybe looking to build a capital base you can use on retirement or for a specific event and building up a Real Estate asset will do that for you. Or, you could be looking to build regular income from the rental income you will receive from the property(s). You may even have come into some money and Real Estate seems to be a good way of investing it.
Depending on what it is you are hoping to achieve the type, size and cost of the property you will buy may be different.
2. What sort of property will you buy?
This will depend on your reason for buying, what you hope to achieve and how much money you will be putting into the property.
Basically you can pay in cash, put some money in and borrow the rest or borrow the whole amount.
If you put all or a large amount of the money in yourself the need for immediate rental income will not be as critical as if you were borrowing a large amount or all of the cost.
If you are buying a particular property because that is where you are going to build your retirement dream home the actual dwelling may not be so important and hence any income you receive may only be enough to pay the taxes. Here you will need to be able to put in most of the money yourself or have sufficient capacity to service the loan you take out on the property.
You may wish to make a more speculative purchase on a property that “in the future” could be re-zoned or redeveloped, i.e. an old house that could be re-zoned or redeveloped at a later date for units or shops. Again you will have to consider the interim income, taxes and holding costs against the future profit potential of holding the property for a suitable period.
If you are borrowing and relying on the rental income to service a loan you will need to consider:
- How much will the property earn, realistically,
- What are all the costs involved (i.e. agent fees, rates, maintenance, etc)
- Will it rent easily? An average house is easier to rent than a unique one.
- What is the vacancy factor if the tenant moves out?
- How long can you support the loan if the property is vacant?
These questions will help you to decide the best property for your needs.
For example, if you are looking to have rental income pay off a loan and build up an asset over a number of years you may look at a duplex or 2 or 3 flats where you are getting good rental returns and more than one income if one tenant moves out. Here the additional income may pay your loan off quicker even though the capital gain may not be as much as another property which could be harder to rent.
You need to buy to suit the area. If the area you are in is predominantly couples with kids you need a house that these sorts of families would be likely to rent, 3 or 4 bedrooms, with space, fenced yard, access to schools and shopping centre’s. Areas with newlyweds who commute will want a property to suit them, i.e. low maintenance, small yard, close to facilities.
Be aware of ………………
Once you have decided on the property you want, the two biggest considerations are:
Can you really afford it? It is not worth risking you and your family’s security over a property you won’t even live in, and if you do “have” to sell it for any reason you may not get as much as you had expected, or would have received if you had sold when you were ready. All I can suggest is to “sleep on it” for a couple of days before you commit to the purchase. If you are unsure seek advice or pull out of the purchase. Another opportunity will come along when you are in a better position.
How will you structure the purchase? There are a number of options such as owning the property jointly, in the wife’s name, in the kid’s names, a company, superannuation fund, family trust and more. How you structure your investment could mean the difference of thousands of dollars in income tax and capital gains tax you will have to pay. For advice on this you must see an expert who is able to look at your particular situation and advise you of your options.
This information is really only an overview so that you will consider all the options and risks of property investment and if you now have more questions in your mind that is great. As with any purchase you must be educated and part of that, is knowing the right questions to ask.
As a Solicitor who spends 90% of his time practicing in Property Conveyancing, I am available to answer your questions for you and to assist you with your decision making. I am also able to refer you to experts in areas such as Capital Gains Tax, negative gearing, etc and would be pleased to do so. All you need to do is ask.