10 essential property investor rules

To be successful in property investment you must develop a strategy that fits your personal and financial position. Seek the advice of experts and put yourself in a position to make informed decisions. Below are some general rules which we have put together after many years of property investing experience:

1 – Location

For a successful property investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind – in both terms of good rental potential and capital growth. Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth. The property needs to be located in a safe, clean, attractive environment and preferably the area will have an already-established high rental demand.

2 – Buy quality

The quality of the property is crucial. The building must be appropriate for the market – for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise. It should be well-built and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are easy to maintain). If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution. Irrespective of the type of property you buy, a pre-purchase building inspection and pest inspection is a must.

3 – Gross versus net returns

Long-term capital growth is highly desirable when investing in property, but on a year by year basis you will also receive income in the form of rent. It’s useful to understand the difference between your gross return (rent) and your net return (the rent minus your investment expenses). Some examples of typical investment expenses include interest on the investment loan, rates, insurance, body corporate fees and maintenance. The net return (or loss) is the figure that helps you to understand how your investment is travelling.

4 – Coping with vacancies

Approximately 35 per cent of Australian households rent, providing a large pool of people who are housed in or looking for rental accommodation. Nevertheless, you do need to be prepared that your investment property may well be vacant for a period of time, hence it is important to allow yourself a cash buffer to ensure that you can continue to pay the costs of owning the investment even if you are not receiving rental income. You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week. However a well kept, appealing property in good condition, in the right area and most imortantly at the correct market rental should not be vacant for long periods.

Before investing when establishing affordability with your finance advisor be conservative and calculate with a vacancy period built into the figures. Professional property mangement is essential.

5 – Issues to avoid

As we mentioned throughout the website, if you are making a direct investment in an investment property then the specific property that you choose will have a significant influence on whether you make a good long-term profit or not. Some common triggers for failure include:

The purchase price was too high.

The property is in an area of low capital growth potential.

The maintenance costs are too high.

The rental income is too low.

Vacancy periods are too long or too many.

The loan taken out was structured wrongly.

Some tax deductions are missed.

6 – Properties must be easy to hold

Property investing is a long term proposition.

Holding costs must be manageable and low risk or you may be forced to sell when you don’t want to. New quality properties are usually easier to hold onto than older properties due to the additional tax depreciation benefits for new property, plus “gearing” tax benefits and on average higher rentals. In addition very little maintenance is usually required on a new property in the first 5 years and most new properties have a statutory construction warranty of up to 7 years (depending on property type and location).

You can delay settlement for new properties by buying off plan and before construction is completed. Properties make money over time and the longer you hold onto them the better the capital growth potential. Holding costs are extremely important and if there is an opportunity to delay paying holding costs then astute investors are extremely motivated to take advantage of securing properties, without impacting their cash flow.

7 – Invest in a diverse range of properties.

There is no magic suburb or city that is always the optimum location to invest – more than ever todays investor need greater flexibility to invest where the best opportunities are located. Geographically diverse portfolios reduce risk and maximise returns.

8 – Avoid Student Accommodation or Serviced Apartments

Australian Residential strategically targets properties that with strong capital growth potential, are easy to finance and can potentially be sold to either owner occupiers or investors in the future. This factor will ensure the best price and easiest sale in future if/when an investor needs to sell (even though you should never sell unless you absolutely have to). Serviced Apartments and Student Accommodation operate more like commercial properties than residential properties (even though people live/stay in them). The advantage of them is that usually they will generate a higher rental return.

There are two important disadvantages (if you are targeting capital growth) of student accomodation or serviced apartments that far outweigh the slightly higher (on average) rental returns:

1.Hard to finance

Investors need a larger deposit than normal residential properties. Most lenders don’t like these types of property due to the perceived (and actual) risk in not being able to sell quickly if / when they had to because you can only sell them to an investor.

2. Lower capital growth

There are restrictions of use on the properties that exclude owner occupiers living in them which means that you can only sell in the future to investors (limiting your future sellers market)

Owner occupiers tend to be more emotional purchasers and pay higher prices. By excluding being able to sell to this group you limit the potential sale price you may get if/when you sell.

9 – Always budget and crunch the numbers carefully with a finance professional to confirm affordability.

Unfortunately most investors don’t have the time and expertise to be able to recognise which property will make the best investment, and miss many fantastic opportunities.

Successful investors utilize their strengths and manage their weaknesses by utilising the services of finance specialist to ensure affordability.

Successful investors identify specialists who have experience in accessing, researching and selecting quality investment properties, and get them to do all the work.

10 – Top Tips

• Avoid buying a property on impulse; spend time researching the area that you are considering thoroughly before you commit to a purchase.
• Consider the funders property valuation before you buy.
• Also get independent advice on the sale contract before you sign, ie from a solicitor.
• Remember that interest costs and property-related expenses are tax deductible.
• Speak with your accountant about the issue of depreciation.
• Have a long-term view. Build a portfolio of property over time. The ulimate goal of property investors is a passive income from their rental properties, therefore you need to get more properties than you intend to ultimately hold onto.