Property investment: how to make it happen for you

10 Oct 2017

ThinkstockPhotos-486487359-800px.jpgGetting into the property investment game can feel like a gamble, with both risk and reward at stake. So, it’s important to get all your ducks in a row for the best chance at success.

Assess your financial position…
It’s important to assess your financial position by speaking to your mortgage broker, financial advisor and accountant to get a thorough understanding of your purchasing power and your borrowing capacity. Don’t be afraid to ask heaps of questions! Remember, time spent planning and researching is never wasted.

Understand your investment strategy…
Once you have a good understanding of where you are financially, it’s time to determine the right investment strategy for you.
Property investment yields two types of returns: ‘capital growth’ and ‘rental income’.

Capital growth refers to the property’s increase in value over time, which can lead to a profit come selling time. Rental income refers to the ongoing rent you receive when your property is tenanted. Unfortunately, it is unlikely that an investment will have both a high rental yield as well as strong capital growth over the same time, so you need to weigh up your options.

Capital growth is a long-term strategy and the rental yield is a short-term strategy. If you are prepared to hold the property for the time it takes for its value to increase, then focussing your property search on areas that are likely to experience capital growth may be more suitable. However, this strategy does come with a fair amount of risk, mainly being that capital growth is far less certain than relying on your rental income.

Your decision will be based on an array of factors such as your age and when you plan to retire, job security, your income level and whether it is due to increase, remain the same or decrease in the future and so forth. That’s why involving trusted, accredited professionals in your plans is imperative.

Choosing the right way to finance your investment…
When choosing the right loan for you, whether it be a basic or more standard variable loan, we recommend seeking professional advice from your mortgage broker who can tailor their advice and find a loan that will best suit you and your current circumstances.

Borrowing to invest often becomes increasingly cost-effective over time as rental prices generally rise; the value of the property often increases (capital growth) and normally so too does your personal income. You can also claim a range of property investment tax deductions, which can help.

However, none of this negates the need to obtain a well-structured mortgage loan that is compatible with your budget. Economic conditions (particularly interest rates) can change quickly – fluctuations are part and parcel of the real estate market and we can’t always control our personal circumstances, so having this part down pat will be one of the best things you can do for yourself.

      ·  Interest-only loan
Property investors can choose an interest-only loan, where repayments only address the interest on the loan. This arrangement keeps repayments to a minimum. In theory, if there has been capital growth, the investor can sell off the property at a profit, while only ever addressing the interest costs.

As borrowing expenses (including loan interest repayments) and outlays to manage an investment property are tax deductible, an interest-only loan has those taxation benefits.

These loans have associated risks because they rely on capital growth – by leaving the principal debt intact you are not adding any equity. They also tend to attract higher interest rate charges when compared to standard fixed home loans, or have a variable rate.

So, if there is no capital growth, or worse – capital decline, you will make a loss on your investment if you must sell.
Choosing an interest-only loan is beneficial if you are using negative gearing and are looking to reduce your overall taxable income. If you want to build equity without relying on capital growth, or plan to move into the investment property as your primary residence in the future, an interest and principal repayment loan is advised. But again, speak to your mortgage broker who can give you advice tailored to your individual situation.

      ·  Using your superannuation to invest in property
There is detailed legislation surrounding the creation of a self-managed superannuation fund (SMSF) and using the SMSF to invest in residential real estate. Restrictions you should consider include:
  • The investment property must solely provide equity towards the fund member’s retirement
  • Fund members or related parties cannot rent or live in the property
  • The investment real estate cannot be purchased from a related party
  • SMSF gearing attracts higher costs and the SMSF must provide the cash flow for the loan repayments
  • You can only borrow money to maintain the property not improve it
  • You cannot offset tax losses against your taxable income earned independently of your SMSF
Insurance for investment properties…
There are several insurance costs that need to be factored into your final budget analysis, including:

Landlord insurance: Landlord insurance offers an important safety net for investors. It covers both the property’s building and internal structure (permanent fixtures) and it protects you in the event a tenant defaults on rental payments or damages the property.

Additional contents insurance may be required if you are leasing out a fully furnished investment property. Make sure you check the fine print as to what is covered by the insurance inside and out. For example, if the property is near a creek or a river, it’s worth checking the exact definitions of flood and water damage.

Also review whether the building insurance covers fixtures like permanent appliances, carpet, plumbing and cabling. Insurance policies vary significantly and some insurers separate building, landlord (tenancy payment default or damage to the property) and strata insurance. It is important to shop around and decide which policy best suits your circumstances.
  • Mortgage protection insurance: This is a form of income insurance which covers you in the event you are not able to make required mortgage repayments due to unforeseen circumstances, including illness, injury, death or loss of employment.
  • Lender’s mortgage insurance: This type of insurance is required by your financial lender if you are borrowing more than 80 per cent of the investment property’s value.
Taking care of your investment…
One of the final steps in your investment journey, but one that should be considered, is property management.
Some investors like to go it alone when managing their property, but enlisting the help of a property manager from a reputable brand can be one of the best things you can do.

Not only does it save you time and energy finding a good tenant, dealing with the rent and regular inspections, it also helps to cover you should things go awry with your tenant.

Below are just some of the ways a property manager can help:
·         Conduct ID checks on tenant candidates
·         Check candidate’s tenancy history
·         Obtain and review candidate’s character references
·         Access to national tenancy databases
·         They have processes in place should there be rent arrears or damage to the property
·         Can assist in the legal process should you need to go to court
Want to find out if property investment is an option for you? Speak to our friendly team at Peard Finance, who can assist in finding the right loan for you.

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