Rules for Property Investment
There are many types of property investment including apartments, townhouses, house & land packages, land development and property development. As most of our investor clients are not developers we will exclude these forms of investment from our comments. Mostly, however, the same rules apply for all types of investment property.
There are many pitfalls for the inexperienced investor so it’s worthwhile using the following rules as a guide.
Rule #1. Take advice only from experienced professionals.
When getting advice from a friend or an advisor such as an accountant or solicitor always ask how many investment properties they own. If they do not have investment property themselves, you should be cautious about the advice. Your best advice will come from seasoned professionals who have multiple properties that have been acquired over a period of years.
The reality is that anytime is a good time to start investing in property, as property investment is a long term strategy and history has shown that property has outperformed all other types of investment since records have been taken.
Rule #2: Return on investment
The key reason for adopting property investment as a wealth creation strategy is to get a healthy return on your investment.
The higher the rental yield obtained for your investment property the more cash flow you will have to support your investment. For example, if the asking price for an investment property is $450,000 and it is returning a gross rent of $300 per week, then this is a gross yield of around 3.5%. This is regarded as a poor return on investment.
You should be targeting an investment return of 4.5 – 6%+ gross rental yield range. If you’re in the 40-45% tax bracket range and you purchase an affordable new investment property that has a good tax structure, then your weekly cost to support this investment should be minimal.
Rule #3: Location and Position
Whilst location and position are vital in selecting investment property, it’s amazing just how many people get it wrong.
It is critical that you take the emotion out of your property selection process and look at the research available as to the best areas to invest. Many investors make the mistake of buying property in their local area because they feel they know the area.
In the case of apartments it is important to seek property in or close to the CBD”s. Statistics clearly indicate that this is the hot spot for apartments.
When selecting townhouses choose areas in high demand and near shopping centres, public transport and infrastructure.
House & land packages also represent excellent investment property when located near to transport, have access to major arterials, close proximity to schools, universities, major shopping centres, medical facilities, doctors, hospitals, recreational parks, sporting facilities, community centres etc.
At ELSC we look critically at the major development areas earmarked for development by governments. These areas can show promise for strong continued growth over a period of more than 30 years.
Rule #4: Keeping your property tenanted
Your target will be to have your investment property tenanted at all times. The major factor here will be that you have purchased a property in an area that is in high demand by tenants. There is plenty of research about to identify these areas.
When selecting an investment property do your homework in advance and look for properties that are situated in locations that have the type of amenities and services that tenants will look for such as public transportation, easy access to freeways, shopping centres, schools, hospitals, medical centres, etc.
It is also prudent to use the services of a professional property manager. This frees you up to concentrate on other investment property acquisition and let the property manager deal with often complex and legal issues associated with acquiring tenants and tenancy agreements.
ELSC Property is looking to establish a rentals division to provide a comprehensive range of property management services in the future.
Rule #5: Maximising your tax benefits
Many of the expenses for your investment property are tax deductible. The attraction of new investment properties for the smart investor is the fact that you can depreciate the cost of the building and certain fixtures and fittings which provide the opportunity to substantially reduce the amount of tax you may now be paying.
Investment properties can also have additional benefit in the event of tenancy vacancies. If for example you have an extended vacancy of more than two weeks then your rental income will go down. In turn, your assessable income for taxation purposes is also going to go down. This means your tax refund will go up. This will not cover the entire shortfall, but it may cover up to almost 50%, depending on your tax bracket.
Rule #6: Finance Strategy
An interest only investment loan is generally the best loan structure for a property investor who can foresee the property gaining in value over time. An increase in equity will insure a profit is made on the eventual resale of the property. The investor has monthly repayments restricted to the paying off of the interest component of the loan only. This means that there is a significant saving in loan repayments and an increase in cash flow. Interest only loans also provide the following benefits.
1. The real return that you are getting for the property is easier to work out by clearly separating the interest from the principal.
2. There are big financial benefits from tax deductions you can claim on interest only payments as there are no tax deductions allowable off any payments made off the principal.
3. Your monthly repayments will be much lower than they would have been if you had been making both interest and principal reducing repayments.
Give us a call today and we will make an appointment for you to see our Property Advisory service for a FREE no obligation consultation.