If you’re a first time investor, you’re probably interested in the passive income possibilities of property investing, but not sure where to start. And when it comes to building a property portfolio from scratch, starting out with the right techniques and industry knowledge can save you a lot of pain!
So, whether it’s choosing the ideal suburb or negotiating the finances on your first investment property purchase, here are the answers to the top ten questions we hear all the time. We hope they ease your journey into becoming a professional investor. Let’s get started!
Number 1 | How do I invest in real estate?
While the actual act of buying a property is relatively easy, investing successfully and achieving sustainable long term results is the challenging part! You need to understand the three fundamental components to being ready to invest in property before you get started.
Emotional readiness means you need to objectively define and be emotionally attached to your overarching investment goals. This means that you’ll be able to overcome doubt, move out of your comfort zone and move forward with your strategy.
Educational readiness means you need to understand which strategies and properties will work for your circumstances, so you don’t waste valuable time chasing down tactics that are irrelevant. This allows you to reach your goals efficiently…and saves you from making costly mistakes!
Financial readiness seems superficially obvious, but it’s worth noting that not all property strategies require a lot of capital (although it certainly helps and does provide you with a wider range of options). As a minimum you need to ensure your financial house is in order, have a good credit score, little or no bad debt, and a financial buffer.
Number 2 | Which location is best for property investment?
There’s a high degree of very specific education and skill needed to accurately analyse location. You need to consider the underlying investment fundamentals: Population growth, supply and demand, stock and vacancy rates, surrounding and planned infrastructure. Is it close to shops, schools, hospitals and public transport? As a general rule, the closer and newer the infrastructure is, the greater the likelihood of steady or growing demand. Likewise, you need to know your market and your competition, so that you can make sure you’re getting the biggest bang for your buck.
Number 3 | Which property type is best for investment?
The following property types are excellent performers if you’re just starting out, because they’re all about numbers, profit and growth.
New or off-the-plan residential property allows you to fast-track your property portfolio without any fuss. It can rent for a higher price, is lower maintenance, comes with a warranty and provides tax depreciation benefits – allowing you to direct funds towards buying your next property and building your portfolio.
Established residential property can be improved to add value through renovation, subdivision or development; it can also be quickly bought, settled and tenanted. Just be mindful that tax depreciation benefits are reduced and, combined with repairs and maintenance, can affect cashflow and slow down portfolio growth.
Commercial property offers stability, with rents typically paid on time and other expenses generally covered by the tenant. Rents are often higher than residential, and tenants generally sign longer leases with built in increases and options to extend. However commercial property is linked to external economic factors and businesses can fail, meaning lost rent. Just look at what happened through Covid!
Number 4 | How do I know if an investment property is any good?
All properties are not created equally. Affordability will obviously play a big role in the property you can purchase, however beyond that, certain property types will be in higher demand in some areas than others. You need to consider the potential differences between purchasing a house, a townhouse or an apartment. Good local knowledge leads to better property selection, meaning a property that can produce higher levels of either capital growth or rental income – or both!
Sometimes even small differences can radically change your results. From design elements such as access to natural light and ceiling heights, to the quality of the construction and the fixtures; there are numerous factors that may cause your property to gain, or lose, value over time.
Number 5 | Is rentvesting a good idea?
Rentvesting is where you rent a home in an area you love, while buying an investment property in a smart investment location. It can be a great strategy to get your foot onto the first rung of the property ladder. While the biggest benefit of rentvesting is that it allows you to own property without sacrificing lifestyle, there are plenty of other positives as well. These include:
Expanding your horizons You can buy anywhere that’s a solid investment – and that includes interstate. In addition, if you purchase a property in a more affordable area that means less capital up front, so you can get into the investment market sooner.
Growing your wealth Because all your money won’t be tied up in a huge mortgage on your primary residence, you have more capital to invest. And you can leverage your first rentvestment to buy more properties, expanding your portfolio further, faster.
Reaping tax rewards
Rentvesting allows you to take advantage of the tax concessions available to investors, such as claiming deductions against your investment property income – such as the interest paid on your loan, and rental costs like insurance, advertising, strata fees and depreciation costs.
Number 6 | Can I use my super to buy property?
The key advantage to setting up a Self Managed Superannuation Fund (SMSF) means you can decide where your super is invested, as opposed to a fund manager making decisions on your behalf. And if you’re passionate about property, you can choose investment property as your strategy.
It’s important to note that you can’t purchase a property to be lived in or rented by yourself, any other trustee, or anyone related to the trustees. It’s not a holiday home or a cheap rental for you and your relatives; it’s an asset that should appreciate in value and be able to generate income for your retirement. Outside of setting up the fund, some considerations that should be discussed with the help of a financial advisor include:
Leaving a buffer in the SMSF to pay for ongoing expenses like maintenance and repairsIf you are borrowing, the loan-to-value ratio is also generally higher for an SMSF, so you may need a larger depositInterest rates can also be a little higher because it’s considered a commercial investment
Number 7 | Can I invest in property without buying a house myself?
Yes, you can. While your age, income and savings will impact where you can start and what strategies you use, it’s still possible to get onto the property ladder (or improve your position) if you have access to the correct advice. You might even be surprised at the advanced strategies you can use! It’s exploring alternative options like SMSF’s, peer to peer lending, small-scale private offerings and wholesale investment trusts that can help you build a deposit, improve cash flow, accelerate your savings or shorten the time to your next investment. It all depends on where you are now, your circumstances, and where you want to be.
Strategies such as small-scale private offerings and wholesale unit trusts can see you improve your cash-flow by sharing in the profits of a truly passive investment vehicle. By investing with other results-focused property investors you also benefit from the uplift in value created for the fund through significant bulk buying discounts and exclusive off-market opportunities.
Wholesale unit trusts can also be suitable for those who can’t access traditional lending, investors who just don’t want to take on further personal debt to grow their portfolio, or those wishing to invest via their SMSF for accelerated returns.
It’s highly advisable to seek out larger scale co-investment opportunities with property professionals – industry experts who have the time and the knowledge (and the patience) to run development projects like the full time business they are – and then co-invest with them in small to medium sized residential or commercial developments. This allows you to access developer-like profits without taking on the same risks.
At the other end of the scale, perhaps you’re trying to build a deposit, and it’s going to be months or more before you’ve accumulated enough. The savings you do have could easily be parked for twelve months or longer, so you need to get this capital working for you while you’re saving the rest of your deposit. This is where strategies such as peer to peer lending can help you to invest your funds and achieve a better interest rate than standard offset or savings accounts – without the volatility of the share market.
Number 8 | What is a good rental income?
To maximise your rental income, you need to stay up to date with local market conditions and comparable properties in the area. This will help in discussions with your property manager about rental potential. In a strong market you might achieve a higher rent, but when the lease expires or your tenant vacates, if the market has cooled off then your property risks sitting vacant if you don’t adjust expectations.
There are usually some very simple ways to minimise vacancy periods. By dropping your rent you’re more likely to secure a tenant quickly and you’ll often have a choice of tenants. A quick cosmetic renovation can also attract tenants faster and produce a higher rental income. Newer properties can also rent for more, because tenants will pay a small premium to live in something nicer. That means suitable heating and air conditioning, dishwashers, quality fittings, and showers, toilets and taps that don’t leak. Tenants looking to rent for longer periods will also prioritise these creature comforts.
If the rent is set correctly, you should receive multiple applications and have a choice of tenants; and if you are maintaining the property and being a responsible landlord, you can retain higher quality tenants.
Number 9 | Should I rent my property or Airbnb?
Short stay accommodation can be a great strategy to increase yields, with many investors building a successful cashflow portfolio this way. When setting price, as a rule of thumb you should aim to double your baseline rent. So, if you can achieve $400 per week on the long term rental market, you should aim to average $800 on the short stay market.
However, one of the biggest risks with a short stay strategy is cashflow fluctuation; you need a financial buffer to get you through low booking periods. Likewise, guests can cause damage to your property, insurance can be expensive, and you need to think about the time involved in managing the property yourself versus engaging a professional to manage the process for you.
Professional companies are experts in analysing cashflow, occupancy rates, pricing strategy, cleaning services and, of course, guest services. If you’re serious about using short stay to increase yields on your investment property, you can mitigate risk by using a professional management company to manage all of the hassle for you.
Number 10 | How do I find a good property manager?
If you have more than one property, or if you have an older property with higher maintenance requirements, or if the property is located in another state with different legislative requirements, or if your tenant proves to be a bit of a handful, or there is a dispute, or you’re not sure about how to implement a rental rise, or you need to find a new tenant in a hurry…then having a top notch property manager on your team is a must have!
In addition, every single landlord would like to receive top rental value (or more) for their investment at all times, with zero down time and no advertising between tenants. And nobody is better placed to understand current market conditions and appropriate pricing than a professional property manager.
So how do you find a good one? Shop around, arrange rental appraisals for your property (this should be free), find out how many properties are directly under their management (the fewer they have, the more time they can dedicate to your property), do they conduct property inspections personally, or do they outsource this function?At the end of the day, as with anything, you tend to get what you pay for. So, it’s best not to shop around on fees alone just to save yourself just a handful of dollars a week. And the best thing is, if you don’t get it right the first time, then it’s actually fairly easy to change! Click here to find out what you need to do…
We hope you’ve found the above useful and informative. If you’d like to find out more, then one of our dedicated property mentors or managers would love to hear from you! Just book in your free discovery call to get started. And keep an eye on our blog for the top five things every investor should do to improve their property journey in the coming weeks! Because after all, when it comes to investing in property…
