Thinking of investing in property?
Thinking of investing in property? Great idea. We'd love to help you get started, however, it’s important to have a clear long-term real estate investment strategy. Are you going for high rental returns for the short term or are you more interested in long term capital growth?
If you’re thinking about investing in property for the first time, it’s important to seek professional advice.
Investing in property has several benefits, including the potential to:
•Generate capital growth – increase in the value of your property over time
•Generate rental income and yield – annual rental income less maintenance & mortgage costs
•Gain potential tax advantages associated with negative gearing – you can deduct the costs of owning your investment property from your overall income, reducing your tax bill.
WHAT TO BUY
If you’ve decided that investing in property is the way to go, it’s important to recognise that the way you might choose an investment property is very different from how you would choose your own home. Some points to consider:
•Buy a property that fits your strategy, e.g. do you want to negatively gear, are you interested in commercial or industrial real estate, do you seek properties which you can improve?
•Understand all the expenses including, stamp duty, strata levies, council and water rates, property management fees.
•Consider getting Landlord Protection Insurance to cover you if the unexpected happens.
•Whether you can cover mortgage repayments if the property is vacant for a period of time.
•Choose a loan that suits you and consider an interest only option, as it will lower repayments and increase your cash flow.
•Keep up to date on the latest property trends.
Is it better to buy an apartment or house?
•Do your research to find out what the market demands locally.
•Talk to a First National Balwyn North agent to find out what’s popular in different regions.
•If you have a location in mind, focus your research on what type of property is in demand, historically, in that area.
•If you plan on building a portfolio of properties, a mixture of houses and apartments is a good strategy.
•Some investors like to buy apartments because the Owners Corporation looks after the common property and overall building management. Some dislike Strata Title quarterly levies and the risk of ‘Special Levies’.
•Apartments are usually less expensive so the answer may lie in affordability.
•Some property investors believe apartments are too similar to one another and that houses offer more potential to differentiate and add value.
•Investors who buy houses must bear 100% of the costs of maintenance whereas strata title and community title owners share costs.
WHAT TO LOOK FOR WHEN INVESTING IN RENTAL PROPERTY
From an investment perspective, a rental property is best when it is located close to transport and centres of employment. Typically, this means properties within a 10 km radius of town centres of CBDs will perform better over time.
Tenants like the same fundamentals in a home that you do, so look for bright and sunny aspects, neutral colour schemes, good security, parking, storage, and modern conveniences like air-conditioning and dishwashers.
Ideally, your goal should be to buy a property that will deliver maximum capital growth over time. This depends on the three laws of real estate; position, position, position. Also, talk to your mortgage broker about the areas that banks are happier to finance because this generally provides a good guide to areas of lower risk.
Likewise, rental yields differ from area to area, so do your homework. You should be aiming to invest for the medium to long-term and will need solid cash flow to maintain your mortgage repayments.
Think about the demographics of the area in which you want to invest as well. If you’re buying a property near a university, more bedrooms are likely to be more popular with students than a big garden. By contrast, a big garden and a pool will be far more appealing to tenants in a family area.
When it comes to buying an apartment in a Strata Title or Company Title building, make sure you obtain a report on the building’s finances and management from the company that manages the building. This could reveal whether there is any major upcoming maintenance on lifts or pools, or whether there are major future expenses such as roof replacement or fire safety compliance work. With houses, conduct a building and pest inspection before buying.
Above all, focus on buying with your head and not your heart. Many investors look to buy something they would be happy to live in but this can lead to mistakes. Stick to the principle of buying a quality property in a convenient location with all the features that will keep your property rented. That way, when you come to sell, another savvy investor will be prepared to pay a competitive price for your property.
BUYING A NEW OR EXISTING HOME
•Older properties are sometimes cheaper than new ones, depending on the location and condition of the property.
•Older homes offer charming period features and, often, higher ceilings, quality timber floors and unique architectural features.
•Older properties may need renovation of major systems such as heating/cooling, wiring, plumbing, roofing, but they can offer significantly more margin for renovation and profit.
•New homes are designed to suit today’s fashions and lifestyles. They’re more likely to appeal to a wider market of tenants if well located.
•New properties may be entitle you to claim depreciation, giving you extra tax benefits.
BUYING "OFF THE PLAN"
Buying a property before it has been built comes with a raft of advantages and disadvantages:
•If the market is rising, real estate purchased off the plan can be worth more than the initial price paid by the time construction is complete and settlement comes around.
•Speculators may quickly realise a substantial capital gain, just days after settlement, having really only invested their initial deposit.
•You’re buying something that doesn’t yet exist and can’t be 100% sure it will be exactly what you expect or that it will actually be completed.
•If you’ve speculated on a quick profit and the market falls, or there is limited demand when the time comes to sell, losses can be large.
•Developers can often alter the plan, based on obstacles that arise during construction, sometimes leading to a larger or smaller property than originally expected.
•There’s no certainty as to the quality of the completed construction at the time of purchase.
How can I make sure I am not paying too much for my investment property?
•Make your offer 'Subject to Satisfactory Valuation' and stay in touch with your Lender who will order a valuation while processing your loan. They will generally provide a conservative valuation. If you’re not happy, you may withdraw your offer.
•Research your chosen suburb and attend as many Auctions as possible before you bid.
•Look up recent sales in the area using agent’s websites.
•Purchase a Suburb Report from a respected data house such as RP Data – www.rpdata.com.au.
•If you are not confident, use a buyer's advocate.
Landlord Protection Insurance gives investors some protection in the event that a tenant stops paying rent, abandons the property or inflicts malicious damage.
Before you start looking for an investment property you need to know how much you can afford to spend and repay.
•The amount you can borrow will depend on a number of factors. Use a loan calculator to get an estimate.
•Your Lender can give you an idea and/or a pre-approval on your borrowing capacity, which is usually valid for three months. This gives you an accurate estimate of what you can currently afford, taking into account:
- Your annual income;
- Your monthly expenses;
- The type of loan and current interest rate;
- Repayment type (principal or principal and interest);
- The loan term (number of years to pay the loan back); and
- Estimated repayments.
You’ll need a real estate agent’s assessment for that. Ask us at First National Balwyn North for an obligation free appraisal.
PAYING OFF THE INVESTMENT
First National Real Estate has lots of tips throughout this website, however, here are some fundamentals:
•Get a Tax Depreciation Schedule annually to maximise your tax benefits. For more information visit www.bmtqs.com.au
•Talk to us for advice about what improvements you could make to obtain more rent
•Pay your mortgage twice monthly, rather than monthly, to pay off your loan faster
SELF-MANAGING THE RENTAL PROPERTY
If you're considering managing your own investment property, it's vital that you familiarise yourself with the specific legal rights and obligations of landlords and tenants in your state.
These regulations may change frequently, so staying up-to-date should become a regular part of your routine.
LANDLORD'S MANAGEMENT AGREEMENT
Landlords are required to complete a management agreement, which engages the agent to manage the property on their behalf. This agreement includes:
•Regularity and reporting of inspections
•Details of payment to landlord
•Level of expenditure and process in relation to maintenance/repairs
•Notice required for cancellation of agreement
USING A PROPERTY MANAGER
A property manager will be able to help organise your property so it is suitable for new tenants. Whilst the property is occupied, the property manager will make sure all repairs and routine maintenance tasks are carried out.
Finding the appropriate tenant can present challenges. Your property manager can set up an advertising strategy to target the right tenants, arrange an open house inspection, and sort through applications to present you with the best range of alternatives.
Property managers can also help you establish an appropriate rental price. They do this by researching nearby properties and balancing what you want with advice about what the market has the potential to deliver.
FINDING A PROPERTY MANAGER
With different tenancy laws in every state of Australia, investors need quality property management services more than ever.
These 7 steps should help you hire a property manager with confidence:
1.Ask if comprehensive reference checks including employers, referees & previous managing agents are done with each application.
2.Ask if your agency uses a National Tenancy Database to check all tenant applications.
3.Check the agency’s reputation by conducting an online ‘reviews’ search.
4.Ask if you’ll have a dedicated Property Manager or will several staff manage your property.
5.Ask if your agency allows tenants to register their property search online, and, whether it uses tenant-matching systems to find tenants faster.
6.Ask whether your agency will accompany all tenants when they inspect your property.
7.Ask how your property will be marketed, when vacancies happen.
THE RENTAL PROPERTY LEASE AGREEMENT
A lease/tenancy agreement will be prepared that specifies the rights and obligations of the landlord, agent and tenant, and will include the following:
•Terms of lease/tenancy;
•Requirements of the landlord clearly stated and obligations of the tenant fully outlined;
•Details of how vacation notice must be given;
•Rental bonds; and
•Special conditions as presented by the landlord/agent and agreed by the tenant.
Every investment property owner needs a capital allowance and tax depreciation report. As a building gets older and items within it wear out, they depreciate in value. The ATO allows property investors to claim a deduction related to the building, plant and equipment items contained within it. For more information, visit www.ato.gov.au
Any owner of an income producing property can claim depreciation. This deduction essentially reduces the investment property owner’s taxable income – they pay less tax! There are usually thousands of dollars to be claimed in depreciation deductions on any investment property.
There are many benefits for investors when claiming tax depreciation, some include:
•More money in your pocket at tax time.
•You can adjust your previous tax returns – get your money back from the ATO!
•The fee for a tax deprecation report is 100% tax deductible.
When you acquire a property, there are government charges by way of stamp duty and registration fees on the transfer of title and mortgage. There are also solicitor’s fees for the conveyancing of your property (and selling it if you decide to do so in due course).
Making sure you have the right real estate company managing your investment is vitally important. First National Balwyn North can save you time and take the hard work out of owning an investment property.
A PROPERTY CONDITION REPORT
This is a report that is compiled at the commencement of a tenancy, prior to your tenant moving into the property, and at the end of the tenancy.
The report outlines the condition of the property at the commencement of the tenancy and is also referred to when the tenant vacates, to ensure that the property is left in the same condition as when the tenancy began. A final inspection is carried out as soon as possible after the end of a tenancy, when the tenant has returned the keys.
The Property Condition Report is used at this final inspection and each item is checked off to make certain that the property is in the same condition as when the tenant took possession. It is at this inspection that any items that need to be rectified by the tenant are identified.
A ROUTINE INSPECTION
Routine inspections are conducted after a tenant takes possession of the property and are conducted periodically for the life of the tenancy.
These inspections are essential to ensure that your property is being maintained to an acceptable standard and to identify any maintenance that may be required. A copy of the routine inspection report is forwarded to you after each inspection and, should it be necessary, a member of the Property Management Team will contact you to discuss items noted on the report.
WHEN A TENANT STOPS PAYING RENT
Tenants have several options to pay their rent, leaving no excuse for late payments.
•By cheque or money order.
•Internet Banking through their chosen financial institution.
•Direct debit from their nominated bank account.
When a tenant falls behind in their rental payments, they are issued with a notice of breach advising them that they are behind and requesting that they rectify the problem. If this is not done within the stipulated time period, then a termination notice is issued, requiring that they vacate the premises.
RENT MONEY PAID
Unless instructed otherwise, all monies held are paid to you by way of direct debit/cheque to your nominated bank account at the end of every month. A statement is issued at the same time, outlining the debits and credits for that month.
Land tax is an annual tax payable by owners of land. Land tax is administered by your state or territory government and is applicable everywhere except in the Northern Territory. It does not apply to your principal place of residence but does apply to every investment property you own.
It’s wise to insure from the moment you have signed a contract to buy your home. Risk passes from seller to purchaser, immediately upon purchase, even though you have not settled and taken possession of your new home.