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The most important piece of
advice when investing in the
property market is to do your
homework.
Check your finances
Assess your budget realistically so you know whether
or not you can afford the monthly cost of an investment
property.
Fixed interest rate loans are very popular with investors
as these allow you to accurately budget for your
repayments, knowing your levels won’t increase.
And because it’s only the interest that’s tax deductible,
most investors believe that repaying more is not tax
effective.
Always remember, your owner-occupier home
repayments should take priority over your investment
loan because your interest payments on your
investment loan are tax deductible.
Your local CENTURY 21 agent can advise you of the real
costs of buying an investment property. In addition
your CENTURY21 Home Loans consultant can show
you how you can best structure your finance to
maximise your returns.
Estimate your capital gains and rental return
While your choices regarding your homeowner property
will be primarily influenced by emotional reasons (such
as personal taste), your property investment will need
a different approach. The best way to view your
investment is in purely financial terms of risk and
return. You need to consider both the rental return and
the potential capital growth.
How long will you keep it
It is important to have a plan upfront
of how long you intend to hold your investment
property. Most financial advisors believe that the
minimum timeframe for investing in property is five
years to allow sufficient time for capital gain.
Location, Location, Location!
There’s a reason why the catchcry, “Location, location,
location!” is such an over-used phrase: it’s because
location is your potential trump card in property
investment. Spending time researching areas before
you invest can save you effort and wads of cash; and
choosing the right areas is not as straightforward
as it sounds!
Put yourself in the shoes of your future tenants when
deciding upon location; those who are renting usually
value convenience, so include proximity to public
transport, public amenities, shopping centres and
parks in your choice. It can also be a good idea to buy
property within convenient driving distance of your
own home, so you can check on the property with
relative ease.
Talk to the experts
Talk with your local CENTURY21 agent about vacancy
levels, rental levels and expected future capital growth
of the area. Make sure that you have a really good
understanding of an area before you purchase a
property in it.
Dot your “i”s and cross your “t”s
Reassess your budget with a view to gauging exactly
how much you want to spend; of course, the choice of
unit or house will have significant bearing on this. Units
are generally a more popular choice for several
reasons; less maintenance is involved, larger tenant
demand and generally lower price range.
Many investors look for newer properties where the
maintenance is going to be less than older properties
but find that depreciation tax deductions are higher.
Who looks after your property
While some property investors choose to take the
management of the premises upon themselves, most
people prefer to arrange for a real estate agent to
manage the property for them. Your local CENTURY 21
agent is fully versed in all aspects of property
management and can assist you so that you can sit
back and enjoy your investment. Remember that if you
do decide to take up the role, there will be a number of
aspects to consider: finding and vetting the right
tenants, collecting and accounting for rentals, paying
outgoings such as body corporate fees and rates,
arranging maintenance work and conducting ongoing
inspections.
Think carefully about whether you’ll realistically have
the time to cater to these pressing needs.
Assess the risks
Any entrepreneur will tell you that calculated risks are
a necessary factor of the money game. In terms of
property investments, the key is to balance risk against
your projected returns. Be aware of the following risks
before you buy an investment property.
1. Your property may prove difficult to let
2. The rental may turn out to be less than you
expected
3. Interest rates could rise, increasing your
repayments
4. Maintenance costs may be higher than you
budgeted
5. Problems with tenants may arise creating
unexpected hassles
6. There may be no capital gain; or worse, your
property could decrease in value
7. You may have difficulty finding the monthly
shortfall from your other income sources
To succeed in property investment you need to devote
time to some serious planning and preparation.
However, if you are prepared to do your homework
upfront, investing in property can be extremely
satisfying as well as financially rewarding.
Negative gearing
The term “negative gearing” is classic jargon that is
often misunderstood.
An investment property is “negatively geared” when
the mortgage interest and other tax deductions such as
management fees, rates and maintenance costs are
greater than the rental income.
This results in a net loss that may be offset against
your other income (such as your salary) which then
lowers your overall tax bill.
In this way, the taxman as well as your tenant helps
you pay for your investment property. And hopefully,
your property is steadily appreciating in value.
Most people feel more comfortable “gearing” or
borrowing to pay for an investment property or
properties than borrowing to purchase shares that are
generally much more volatile.
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