Conventional wisdom says “buy dirt.” Land is a tangible investment that makes good sense, but the ins and outs of real estate purchasing vary greatly depending on whether you are buying for a home or as an income-producing property. The rental market today is extremely lucrative, resulting in the best property investment Australia has seen in years, but there are a number of important factors to consider in order to avoid costly mistakes. As an example Strata Data Management SA tell us that investing in strata titled property may benefit some investors as they are generally cheaper than free standing properties, require less management and maintenance, and with diminishing land in capital cities strata properties are seeing consistent growth.
1. Consider the Initial Costs
Before you invest in an income-producing property, you must determine your budget. Lenders will usually require a minimum deposit of 10% to 20%. Investment property is generally easy to research and understand, and banks usually have an easy-to-follow process to follow when applying for a home loan Australia. Don’t let the ease of the process lull you into a false sense of security, however; there are many additional costs on top of the purchase price, including the following:
- stamp duty
- building and pest inspection fees
- legal fees
- conveyancing fees
- insurance costs
- set-up costs for investment property loans
- realtor fees
2. Plan for Taxes
While many of the costs associated with an investment property may be tax-deductible, the capital gains tax you may be subject to could be significant enough to negate those benefits. Some investment property owners plan to use the losses that come from negative gearing, where the expenses of the property outweigh the income, as a tax deduction. Not sure what this means for you? Speak to a Brisbane quantity surveyor or a legal professional who is equipped to help you with the nuances of property taxes. The success of this strategy hinges on the individual investor, property, and rental fees. If the property incurs a loss, you will rely completely on capital growth to result in investment return. This is a risky strategy, requiring sufficient cash flow to cover your losses, including the potential increase in payment amounts if interest rates go up.
3. Do Your Research
Income property can yield financial benefits from rent or re-sale, but that is based on the assumptions that the rental market will stay strong and property valuation Melbourne values will increase over time. Before taking on the risk associated with a big investment, you should research the following:
- Capital growth – What is the expected rate of increase in property value?
- Income on rental property – Wat is the current rental income? What are the vacancy rates? What are the projections for future rental income?
- Type of loan – Which option is best for your financing needs: fixed, variable, or split-interest rate loans?
- Continued operational costs – What are the maintenance costs? What are the current and projected insurance rates? Are there any property management fees or other hidden operational costs?
4. Don’t Bank on Equity
Many individuals choose to use their equity, the difference in current market value and any amount owed on the property, to secure another loan for renovations or other investments to the property. However, it’s important to use caution and avoid counting on this, Equity value can rise and fall with the property’s market value, and simply having equity does not guarantee you can borrow against it. Doing so will increase debt levels. which can have ramifications on your long-term credit.
5. Budget Wisely
When you invest in your own property, you have control over the important decisions such as making improvements to the property or paying down the loan quickly with additional payments to the principal. Be sure you spend your money wisely to obtain the most effective return on investment. Consider the value that you will get out of any improvements that you make to the property, remembering that bathrooms and kitchens hold the most value and that caution should be used to avoid over-improvement for the area. Also remember to budget for common ongoing costs, including:
- council fees
- water rates
- strata fees
- property maintenance costs
- property management fees
- vacancy costs (lost rent, advertising, etc.)
- insurance costs
- land taxes
Australian investment property offers great opportunity for regular income and long-term profit if the venture is entered into with research and preparation. Be sure to investigate the risks and prepare to take full advantage of the rewards, and you will find investing in Australia to be a great experience for personal and financial gains!
