Tips for buying an investment property.
Choosing the right property at the right price.
Investing in real estate is usually all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you will make, so buying at the right price is absolutely critical.
Unlike buying shares where the value of a company is transparent, real estate is more difficult to price. This, however, provides you with the opportunity to acquire an asset below its real market value if you are patient and knowledgeable. The key for you is to do your research, work out what everything is selling for in and around the area and then you’ll discover that soon you’ll become very good at working out what a property is worth, you’ll know a bargain. If you do find a property that you like and are unsure of its real value we’d suggest contacting Belle Property so you can arrange a valuation, so you are armed with the right information.
Ensuring that you have a steady rental income stream is also vital because the cash flow will make the holding of the asset more affordable and provide income. It is also important that your property suits the demographics of renters in the area. For example, if it is near a university more bedrooms will be in greater demand than a big backyard for kids to run around. A family home that is close to schools and parks on a quiet street will be more desirable than a property on a busy road.
Do your math — Cash Flow is always king!
Investing in property is a proven path to long-term wealth, however, you should consider it a medium to long term type of investment, so you’ll want to make sure that you can afford to maintain your mortgage repayments over the long term. You will not want to have to sell your investment property until you are good and ready and if you were to encounter some financial stress, this could force you to offload the property at the wrong time.
Once you own an investment property it can be quite inexpensive to keep it and service the loan, that’s because you earn rent and get tax deductions on many of the expenses associated with owning the property and remember that over time rents tend to increase as does your own income.
Here is an example of what it might cost you to own an investment property. I recommend that you look at cost of servicing the loan on an after-tax basis, but check with your accountant if you need help with this speak with Jim from The Garis group.
Purchase price of the property $500,000, stamp duty and other costs: $20,000 amount borrowed $520,000, rental income received: $450 per week.
Ongoing colts — interest costs @ 5% p.a. $26,000 rates $1,500 land tax $805 ( calculate your land tax in NSW) agents fees @ 7%: $1,638 insurance: $500
Total costs: $30,422 less rent: $23,400 ($450 per week x 52) annual shortfall: $7,022 less tax deduction: $3,160 (assuming a tax rate of 45%) annual after tax cost: $3,862 or the equivalent of $74.26 each week.
In summary on this example, your cost of holding this investment property works out at only $75 per week. Make yourself aware of taxes involved in property investing and add these into your calculations. Advice from your accountant is vital in this regards as these can change over time.
Finding the right property manager and let them do their job
A property manager is usually a licensed real estate agent that is a professional in their field, their job is to keep things in order for you and your tenant. They will help you with ongoing advice, manage your tenant, and help you get the best possible value from your property. A good agent like Belle Property will let you know when you should review rents.
The property manager will be able to give you advice on property law, your rights and responsibilities as a landlord — as well as those of the tenant. They’ll also take care of any maintenance issues, although you should approve all incurred costs.
The property manager will also help you find the right tenants, conduct reference checks and make sure the tenant pays their rent on time. It is important that you don’t interfere too much with tenant because there are laws that you may not be aware of, always try to respect them. You should, however, make sure your agent is having regular inspections of your property. At Belle Property, we excel at client relations.
Any questions regarding investment properties please call us on (02) 4905 0110.
We’re a partner of the Newcastle Property Hub and highly encourage you to read our previous articles for the full back story of this property. The Newcastle Property Hub creates a “one stop shop” that sets the standard for property renovators, investors, buyers and sellers in Newcastle. Check out our website, and don’t forget to follow us on facebook to keep updated.