Making the leap from property owner to property investor is one of the tried and true methods of building wealth.
Yet some home owners baulk at the opportunity to invest in property for many reasons.
They become content with the lifestyle and long-term security of owning their own home.
They overlook the wealth creation opportunity that becoming a property investor offers via rental income, capital growth and maximising their return on investment.
It doesn’t have to be difficult or intimidating.
By following some fundamental guidelines, you can begin your journey as a property investor and financially set yourself up for life.
Critically, you should ensure you understand the risks of borrowing in the event property prices fall.
Develop an investment strategy
Consider what type of investor you want to be and choose a strategy that aligns with your financial goals, risk tolerance and time horizon.
That may be:
Buy and hold – Purchase a property and rent it out for long-term rental income and capital growth.
Positive cash flow – Invest in properties that generate more rental income than the cost of the mortgage and expenses.
Capital growth – Invest in properties with higher capital growth, even if the rental yield is lower.
Renovate and sell (flipping) – An ideal strategy for hands on investors who love renovating, flippers buy undervalued or distressed properties, repair them and sell them, usually for a tidy profit.
Leverage your equity
Buying an investment property is a numbers game.
It all starts by knowing the value of your asset and balancing that against the investment property you wish to buy.
You then use the equity you have in the property you own to secure a loan on an investment property, borrowing money against the increased value of your original asset to fund additional purchases.
Significant equity normally means you won’t need to save for another deposit.
Research the market
Do your homework to ascertain the most attractive areas to buy an investment property in terms of potential capital growth.
Look favourably upon areas close to schools, transport, amenities and prioritise areas attracting key infrastructure or private sector investment.
Regions where demand exceeds supply tends to drive property prices north and ensures steady rental income.
Investigate the tax benefits
Owning a rental property normally offers you a wide range of tax benefits which can significantly reduce your taxable income.
These include:
- loan interest charges and fees
- council rates, land tax and strata fees
- repairs and maintenance costs
- building and landlord insurance
- depreciation of fixtures and fittings
- property management fees
- accounting fees
- advertising costs
Conversely, you should also be aware of your Capital Gains Tax liability which is payable when you sell your property.
Some of these may be reduced or not applicable if the property is held for longer than 12 months.
Choose the right property type
There are two big considerations here:
Residential vs Commercial – Residential properties usually enjoy more consistent demand and are easier to manage. Commercial properties often attract much higher yields but at the risk of longer vacancy periods.
New vs Established – New properties may come with attractive tax benefits and lower maintenance costs but often with a higher upfront cost. Established properties may offer better opportunities for renovation and capital gains. These include distressed properties which lure renovators or flippers seeking pay days in a relatively short space of time.
Diversify your portfolio
Similar to investing in shares, when you invest in property, diversifying reduces the chances of an economic downturn having a major impact on your portfolio.
That means investing in different types of property, in different locations and price ranges to help mitigate risk.
You could even spread your properties across different cities or states to take advantage of different markets.
Play the long game
Like any investment strategy, the longer you are invested, the lower the risk and the more you stand to gain.
That’s because market downturns don’t negatively impact investors who are in the market for a significant period of time.
Hence, the earlier you become a property investor, the better.
Minimise risk with insurance
Insurance is essential to a property investor to protect their investment.
Important types of insurance includes:
Landlord insurance – this protects you against tenant-related risk such as damage to the property or unpaid rent.
Building insurance – as with your own home, this protects against structural damage including fire, floods and other natural disasters.
Income protection insurance – this is advisable to protect your income and hence your ability to meet loan repayments in the event you should fall or ill or lose your job.
Joint ventures and property syndicates
If you are nervous about the size of the financial commitment, you may consider a partner or joint venture to share the costs, risks and profit.
If you are time poor but are driven to invest in real estate, a property syndicate allows like-minded investors to pool their funds to diversify their portfolio by investing in real estate.
Build a professional team
Every property investor needs a team of professionals around them.
Here’s who you should engage:
Property manager – Unless you have time on your hands, a property manager is essential to advertise the property, screen tenants, collect rent and handle deals with maintenance problems and tenant issues. Expect to pay up to 10 per cent of your rental yield.
Solicitor/conveyancer – These ensure your legal obligations are met when buying and selling property.
Accountant – An accountant should be maximising your tax deductions while ensuring you remain compliant with tax regulations and obligations.
Mortgage broker – an experienced mortgage broker is an absolute must to help you secure the best loan deal.
Get advice now
There is so much to consider when investing in property and no shortage of costs to bare.
These include stamp duty, legal fees, property management fees, repairs and ongoing maintenance.
You’ll also need to procure the right type of loan.
There are traditional variable or fixed rate mortgage loans often drawn up over a 25 or 30-year period, offset accounts and interest-only loans ideal for flippers.
They all impact your cash flow and investment returns in different ways.
That’s why you need great advice from an experienced mortgage broker about which loan is best for you.
And that is why you need look no further than Calder Finance Broking.
Calder Finance will analyse the strength of your assets and your investment strategy to ensure the numbers stack up.
We have years of experience in the lending industry and have built strong and trusted relationships with a multitude of lenders for the benefit of our clients.
Our commitment to you is that we will deliver you the best possible loan with the lowest interest and features tailored specifically to your investment needs.
If a better deal emerges, we will contact you to give you the opportunity to refinance.
Contact Calder Finance today to discuss all of your financial needs and mortgage requirements.
The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Calder Wealth Management’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.
Calder specialises in wealth management with a focus on advice, investment, sustainability, insurance and finance.
Written by David Titley from Calder Finance Broking, for more information please visit the Calder Finance website. Please note that Calder Finance Broking Pty Ltd is a Corporate Credit Representative of BLSSA Pty Ltd ABN 69 117 651 760 ACL 391237.
