Many of us, who have sold and bought property throughout our lives, think we know all about investing in real estate – wrong!
Searching and selecting properties purely for investment comes with completely different criteria. What should be considered is areas with potential capital growth, current and pending infrastructure, yields, tax benefits on depreciation and appropriate financial structure to handle that investment – just to mention a few things. Sure, if you have the time, knowledge and resources you can do the homework yourself but be prepared to spend at least 100 hours searching an area, builder and tax implications. Alternatively, for no financial outlay whatsoever, you can put yourself in the hands of investment property specialists.
TIP 2: LOOK BEYOND YOUR OWN BACKYARD
OK – so we’ve all heard the old adage when purchasing property – ‘LOCATION, LOCATION, LOCATION’ and when it comes to selecting an area to purchase for investment is it very true – the location of that investment property is what will determine, without a doubt, the yield that you attain from that property’s location. The capital growth that you obtain is determined by the rise in property values in the area in which you are investing
First-time investors often purchase in their own area where they live, and unless you reside in an area with recognized capital growth, it is usually the wrong area. First-time investors also like to purchase in their own area so they can drive past and make sure there is a tenant in place – another mistake. If you had shares in Rio Tinto, do you drive past the oil fields to make sure they are producing – of course you wouldn’t. Same with investment real estate.
South East Queensland is enjoying tremendous growth driven by the 75000 people moving annually into this area to take advantage of the low cost of living, plentiful employment opportunities, not to mention the great lifestyle and wonderful weather!! Many of our existing clients are Gold Coast and Brisbane based who appreciate the opportunity of purchasing in their backyard.
TIP 3: SOURCE CORRECT FINANCIAL ADVICE
When sourcing finance for an investment property the main objective is to have the right type of loan at the lowest possible interest rate whilst at the same time achieving the highest tax benefits. Purchasing 50/50 in both partners names when only one partner is in the high-income bracket can be costly. Remember that many mortgage brokers have the capacity to negotiate through many lenders, rather than with one bank only. A loan exit strategy should be considered along with loan break fees negotiated in the event that the property must be sold. Our brokers have the capacity to cover such concerns as can you make extra payments via an offset loan or a line of credit, is a loan portable etc. These are factors that your normal lending institution does not tell you where our professional and experienced brokers deal with these issues on a daily basis. They handle only investment property loans and therefore are experts in their field.
TIP 4: USE YOUR HEAD, NOT YOUR HEART
Remember, you are not going to live in your investment property – it doesn’t matter if you don’t like the colour of the kitchen or the tiles in the bathrooms – this is purely an investment from which you will reap the financial benefits when you sell at the time of your retirement. As long as it is habitable, clean and in the right location you will find a tenant prepared to pay the rent that you seek.
TIP 5: AVOID THE DIY APPROACH TO PROPERTY MANAGEMENT
This is often a trap for the inexperienced investor – they believe that they can save that small management fee, by doing the letting themselves. . Engage a professional and experienced property manager with the skills to source a good tenant (they have the resources to check references and their previous tenancy records through a specialized computer program that they subscribe to). Your property manager will go through a meticulous reference checking procedure, prepare the appropriate lease, conduct regular inspections and handle situations that may arise with problem tenants. They are fully trained in the laws regarding notices, warnings, removal notices etc. Remember this is an investment – and who wants to be woken in the middle of the night because your tenant (who may live hundreds of miles away) has a leaking tap? This management fee is fully taxable – therefore it is not worthwhile contemplating doing letting yourself.
TIP 6: PURCHASE THE RIGHT PROPERTY
This may seem an obvious point, but surprisingly many of us choose the wrong property particularly when the $$ is the motivating factor. Most first time investors purchase a cheap property – believing that the less financial outlay the less vulnerability they have. Unfortunately, this is not the case – as property build prior to 1985 does not qualify for building depreciation thus it will not allow you to claim any tax benefits. An older property usually needs constant maintenance and upkeep. A new property with all the quality fixtures and fittings allows you greater tax deductibility and less hassle, plus you will always find a quality tenant easier than you will in an older less modern property.
TIP 7: BUY WITHIN YOUR BUDGET
There is a fine line between the correct price and the incorrect price to pay for an investment property. Buying an expensive property, (say over $700,000 in most cities) is fine if the economy is running along OK but if the economy has a downturn your expensive/high priced property can stand vacant for a long time or the rent must be drastically reduced to attract a tenant. Paying interest on an expensive property without a tenant can be a nightmare! The wisest thing to do is to purchase a property in the middle of the range price – this is the type of property the masses live in!
TIP 8: DON’T WAIT UNTIL THE END OF THE YEAR FOR YOUR TAX DEDUCTIONS
Many people don’t realize that tax deductions for depreciation on the building, fixture, and fittings can all be received on a regular basis, i.e. each fortnight the tax deduction is added to your ‘take-home pay’ rather than waiting till the end of the financial year, submitting a tax return and then receiving your tax deduction. Your accountant can arrange this with the Taxation Office.
TIP 9: TAX CLAIM ACCURACY OUTWEIGHS ESTIMATION
Often, people, have their accountant make a calculation regarding your tax claim ability. This may be allowed for some time and then retrospectively disallowed! A better strategy is to engage a quantity surveyor for a small fee to give you an accurate depreciation schedule. This will ensure you get the correct tax deductions and stay popular with the tax commissioner, avoiding auditing and possible headaches down the track.
TIP 10: TAKE OUT SUITABLE INSURANCE
We have all seen the segments on TV where a landlord is left with a vacant property which is some instances may have been trashed, haven’t we? Well what those landlords didn’t do is take about appropriate insurance. Landlord protection insurance is very affordable and should really be titled ‘Relax, sleep tight, peace of mind’ insurance, because that is what it allows you to do! It will cover you if a tenant damages your property or leaves prior to the expiration of a lease. Under such circumstances, you will receive the rent until you have the property fixed an/or find a new tenant.