Property investing is all about 3 things:
The first two are normally easy for people to understand if explained correctly and without bias however the third (mindset) is the challenge. We have all been brought up with different views, values and expectations. We get influenced by different things.
Let’s break this down:
Supply and demand is what causes property values to go up or down. Basic economics tells us that if there is sustainable population growth in an area that has limited land and limited properties there is a strong probability that values will go up. If population growth declines and/or there is an abundance of available land or properties values will most likely be slow to rise or even decrease.
So you need to know the facts of what is happening in the area that you wish to invest. What is attracting people to live there? Does it have all the amenities needed to keep them there? What investment is being made by the government and private enterprise to improve and evolve the area?
History has shown us that most areas will go through cycles of price rise, fall, stabilisation and then rise again. It pays to understand where the area you are investigating is on the property cycle. Ideally the best time to purchase in an area is pre price-rise however this is not always easy to determine. Just make sure you avoid buying in areas that have had a great deal of growth as it is just a matter of time before the next phase will begin.
You need to know your figures and how your household budget will be affected with the purchase of an investment property.
Firstly find out what your borrowing capacity is, which is based on your income and expenditure, assets and liabilities. We can help you with this. Once you know this figure you can work downwards to an amount that you are comfortable with. This will ultimately determine which market you will be investing in and the type of property you can afford within that area. It is ideal if you can invest in the vicinity of the median property price of that area as this is the price belt that the greatest number of the local population are renting and buying. This is important both now for attracting the largest pool of tenants and in the future when it is time to sell.
Once you have decided on a property of interest, run an investment analysis which takes into consideration the revenue, all ongoing expenses, depreciation and tax advantages to determine if the investment will be cash-flow positive, neutral or negative. You need to make sure you are happy with that outcome before proceeding to purchase. There is powerful software on the market that can provide a high level of information and accurate forecasting.
Interest rates can also have an effect on property values. This normally occurs on a macro (national) scale as all homeowners with mortgages are influenced. When they are low, as they currently are, people are inclined to purchase higher value properties for them to live in and it is also a lot more attractive financially for investors to purchase more investment properties. Both of these scenarios create a ‘sellers’ market which usually leads to an increase in prices. When interest rates are higher people become more limited in what they can afford which can lead to a ‘buyers’ market and often a correction (a levelling or decline in prices). Just be aware of this and don’t over-extend so that you are forced into having to sell when interest rates rise.
It is very easy to let emotions get in the way of making a smart investment decision. Too often first time investors feel more comfortable buying in areas “they know well”, like the same suburb or city they have grown up in and lived all their lives. This can be financially dangerous if that area is at the top of its property cycle.
Australia is a great country to invest in property as there are always markets at different stages of the property cycle. This is where your mindset has to shift from what it feels and focus on the facts and figures. Approach this as if you were to buy shares in a company. It would be silly to invest in a business that rents videos just because you like watching movies and they have a store close by. If you looked closely at the facts and figures you would realise that this is a declining industry and would be far wiser to invest in an on-line video streaming business as this is an industry on the incline.
You don’t need to live near your investment and drive past it every weekend. In fact that can just be unnecessarily painful. Employ a good property manager who will professionally look after your investment at arm’s length and without emotion. Take out the appropriate insurances to mitigate potential risks; it costs a lot less than what most think.
There are a lot of things to consider when purchasing an investment property however if you surround yourself with a good team you can make it a much more pleasant and rewarding experience. Find yourself a good property advisor, mortgage broker, property solicitor, accountant, quantity surveyor, property manager and financial planner (especially if you intend to purchase within a self-managed super fund).
Successful property investing is a formula. Follow the formula and give yourself the best opportunity of achieving your goals.