Once you’ve found your investment property, and you’re at the pointy end of the process, it’s time to get into all of the nitty-gritty details that will allow you to not only purchase the property but enjoy a long-term profit from it.
At Corbwood & Associates, our role is to connect you with the right services throughout our network – such as financial advisors, legal services, and more – to ensure purchasing your investment property is a smooth process. That’s why we’ve put together this list of the top 5 things to consider when purchasing an investment property.
So What Do I Need To Know About Buying An Investment Property?
Firstly, it’s important to understand the cash flow position of the property. Often you will hear terms being bounced around the industry, such as cash flow negative, cash flow positive, negative gearing, and so on. All of these terms relate to how many dollars will come in from the property you purchase, versus how many dollars will go out.
Typically, in standard property investing, we would have two incomes from your property:
1: the rent that it generates from the tenant
2: the depreciation or the tax rebates that you receive from owning an investment property.
However, when purchasing a property through a self managed superannuation fund, you must consider having a third potential income:
3: the superannuation contribution guarantees that are provided by your employer.
Nowadays, the concept of negative gearing, (i.e.having your property lose money so that it can offer you tax efficiencies), is a strategy that has long passed its best. In reality, with interest rates being at a global historical low, combined with Australia having a significant housing shortage for its growing population, there is a continued increase in demand.
We have seen that the average rental yield in the country now is far surpassing 4%, which is significantly higher than the average investment property loan, which is between just 2% to 2.5%.
Now, you should be targeting properties that are cash flow positive, i.e. bringing in more rent than the outgoings (such as council and water rates, building insurance, letting fees and upkeep fees and of course the loan itself). With that being the case, you need to understand a cash flow-positive property creates income. Income holds the tax liability to make sure you don’t spend all of the rent that you receive before understanding what portion of that needs to go to the ATO at the end of the financial year.
Something else to be mindful of is the necessary insurances associated with the property. Many properties such as townhouses or units can often have a strata title or a body corporate insurance policy. That can come with a range of different benefits or complications depending on its structure setup or format. Understanding these are vital.
Other insurance components that would need to be considered are whether the property has overlays, fire, flood or environmental impact. These things can often affect the amount that you are going to pay each year in insurances.
The third thing to consider is the capital growth of that property – that is, what potential does the property have to increase in value, meaning upon reselling it you will be able to profit from the decision you made to invest in the property in the first place. Things that drive capital growth can be proximity to amenities such as public transport, shopping centres, schools, highways, hospitals, but it can also be microeconomic factors, such as occupancy and vacancy rates, the average income in an area and the balance between owner-occupied and tenanted properties in that specific suburb.
Number four, you need to consider which lender you want to work with and which mortgage structure is going to be most appropriate. There are thousands of different banks and institutions nationally and globally with which you can borrow funds so that you can go on and purchase an investment property. But many of them have a wide range of interest rates, fees, terms, clauses and flexibility, meaning that not all of them are going to be right for you. Like a good news story, don’t just read the headline (i.e. the interest rate), instead read the whole story, it will give you a clearer picture of the upside that you would receive from that loan structure. Keep in mind that offset accounts are an extremely powerful way to be able to accelerate mortgage reduction. But also remember that traditionally we would never want to own more than 20% of an investment property until you own 100% of your own home. The interests paid on an investment property is tax-deductible, interest paid on your own home is not.
Logic Over Emotion
When considering an investment property, you need to remove all of your emotions and make this a purely logical, mathematical and economic decision. It does not matter whether your family prefers a two, three or four-bedroom home. It is not relevant if you do not wish to travel more than 15 minutes to work. What is important is to take a broader look at the market in its entirety. What is the most highly demanded property type, in which area, at which structure, for example, a townhouse, unit, housing & land or acreage? Instead of trying to analyse and understand the market as just one human being, use really good resources. Sites such as Core Logic RP Data, realestate.com.au and National Bureau of Statistics or Property Investor Magazine help you dive deeper into what the experts and professionals are suggesting is going to be the area that you have the greatest probability of sustained rental income and probably capital growth over the medium to long term.
Lastly, engaging Gold Coast property investment Advisory company, such as Corbwood & Associates, will allow you to ensure you are making the right choice. Contact us today for peace of mind.
To understand more about this process, ask questions about your personal circumstance or simply to find out if you qualify to do this, contact us today.