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How to Plan Your First Property Investment
Posted June 21st, 2010
and last modified May 18th, 2011
To enter the property investment market can be a confusing time and no matter what stage you are at in your research or decision-making process, take a moment to stop and refocus your thoughts on what you really want to get out of your property investment and how to make those goals reality, using these simple steps.
- Clarify your reasons for choosing real estate investment. If you have equity in your home or savings in your account there are plenty of investment options open to you by you have chosen to move into the real estate market. Understanding why you have chosen real estate investment will help you choose the best investment property and the best investment loan. For example if you’re investing to build financial independence and earn a passive income then you will be looking for an affordable investment property where the rental return closely matches or exceeds your repayments, and which is in a growing area and will build you equity.
- Decide on investment goals. Take the time to look at your current finances and how you want to be financially structured in the future. This means looking at how much money you will need to maintain your lifestyle once you are finally financially independent, remembering to allow for inflation costs.
- Know where your investment capital is coming from. Before you start investing you need to know how you are going to afford it and you may choose to use the equity in your family home, your savings, you may borrow from a family member or invest jointly with family or friends. If you are in a couple you could consider saving one person’s salary to fund the investment and living on just one salary, and if you live in a one income family then put aside 10% each payday to help you build your investment portfolio.
- Allow time for your investment to grow. To become a successful property investor you need to understand the importance of capital growth because while you may not see strong growth in one year once you have chosen a property in a strong growth area with the right investment loan then you can enjoy the compounding value of the property market.
- Choose the right investment option. If you are new to property investing in residential real estate is a great place to start. If you have room to move in your budget before you need to start receiving an income from your property look for a home which you can renovate. As you become more experienced in the property market you can consider moving into the industrial, commercial or retail investments.
- Decide who will own the investment property. Depending on your financial situation and income tax bracket you may choose to own the investment property in your name, or put it in your spouse’s name. Alternatively you may choose to set up a company which can act as trustee of a trust which owns the property for asset protection purposes and tax benefits.
- Be in the know. As with any industry or community there are basic rules and information which all the ‘locals’ know about, understand and use to their advantage. Therefore to become a successful property investor you need to know what they know and learn about the property cycle for example and how it can affect property values, understand the growth you can expect from an investment property and learn about how the interest-rate cycle will not only affect your repayments but can also affect demand for rental properties.
- Find your investment property. Spend time researching the property market to become familiar with the area in which you want to buy. You may also choose to buy in an area you are already familiar with because you will know which areas are most desirable and the types of people who live in each area, their income and their situation. All of this information will be able to help you find an investment property which you can target to your desired tenants.
- Confirm the balance sheet of your prospective investment property. Take the time to run the numbers once you have found a property which you are considering as an investment. Analyse the property’s investment potential like confirming the rental income for properties of that type and size in that area, check on the expenses the property will incur by confirming the water and council rates for the area, find out how much your repayments will be for a loan of that size, calculate what your cash flow, returns and capital growth will be on whether those benefits are great enough to justify the property’s purchase price. Also take time to research property prices in the area to make sure you are not buying a property which has been given an overinflated value by the agent or owner.
- Find the best investment loan structure for your needs. There are various investment loan interest rates and investment loan structures you can choose and you need to consider how you want to manage your loan and what your current financial situation and cash flow will allow. For example can you ride out current interest rate rises with a variable interest rate investment loan to reap the benefits of additional money-saving features such as an offset account?
- Consider your income and your tax. Calculate exactly how much better off you will be with your investment by calculating your after-tax income taking into account depreciation allowances because you need to be sure that holding an investment property will offer you meaningful tax benefits.
- Negotiate on the property price. As an investor you have the luxury of not being emotionally attached to the property you are making an offer on. That means that if you find the vendor is not willing to negotiate on price then you can easily walk away and find a vendor who is much more desperate to sell. To ensure you have the power to influence the negotiations to include your terms gather as much information as you can. This may include asking questions of the agent about why the vendor is selling, or having building inspections done and being able to leverage repairs which are needed, to reduce the purchase price.
- Work with a conveyancing lawyer to protect yourself. If you are new to the investment market, and even if you’re not, you should seek the advice of a conveyancer to help you manage the contracts and check all of the details before and after settlement. Your conveyancer will make sure that the contract includes all of the terms that you need and want and that you all interests are protected. They will also help you organise title checks and land surveys to ensure the property does not have any hidden surprises such as mortgages or additions which did not go through the council approval process.
- Stay organised. Find a record-keeping system which works to you and stick to it, this may be a simple as a notebook or as intricate as an Excel spreadsheet but using a bookkeeping system to keep track of all of your investment income, expenses and growth will help you manage your investment successfully and ensure future growth.
- Don’t get emotionally involved. Don’t become too emotionally invested in your investment property because it is easy to then spend time and money making improvements which appeal to you, rather than those which would appeal to the tenants of your area. If the property is not performing as expected look for ways to rectify this and you may need to consider renovations to improve the property’s appeal.
- Sell as an investor not an owner. If it has come time to sell your investment property seek a professional appraisal of the property to confirm its market value, rather than setting a value yourself based on your emotions and what you think the property should be worth. Also remember that because you are selling an investment property and because you have been claiming the costs of maintaining that property on your tax then you are likely to incur capital gains tax on the profits of the sale.
- Grow your property portfolio. Being a successful property investor requires diversity and growth so use the equity in your first investment property to help you secure your next investment property. As your second investment property increases in value, leverage that equity to buy a third as this pyramid system of investment allows you to spread the risk of your investment over more properties so if one is untenanted or dropping in value the rest of your portfolio is still performing strongly.
For more information about getting into the property market or to find out which investment loan would best suit you, contact Home Loan Finder now.
Related posts:
- Investment Property Benefits
- How to Refinance an Investment Property and not lose money
- How to determine the Best Investment Property
- Tax Deductibility for Off the Plan Property
- Buying your First Investment Property Guide
- Property Investment Strategies
- How to Build Up Equity in Your Investment Property
- Property Investment Analysis Software, Forums and Seminars
- How to Profit with an Investment Property
- Real Estate Property Value
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