Investing in Property
“Becoming successful in property investing requires a thorough understanding of common pitfalls; knowing how, where & what type of property to buy, and how much to pay for it.”
We believe the key to financial freedom is to invest in safe assets mainly using other people’s money (The Banks). With the potential for solid capital growth and to hold onto these assets for the medium to long term.
Good reasons to invest in property
Investing in property is a sound investment strategy and has long been a favourite for Australians that are focused, educated and proactive.
Over the generations and numerous market cycles, it has delivered solid returns and created wealth for everyday people.
Property investment is not as complex as investments such as stocks and shares, bonds or other financial products.
The investment principles involved in property are relatively simple and, with the right approach, realistic objectives and plenty of groundwork, you can minimize your risks.
Property - The Investment Vehicle of Choice:
In a time of ongoing volatility in global share markets, there is a significant appeal in property investment.
Residential property, in particular, has been widely regarded as a solid and reliable asset class and, with the right advice, structure and approach, it can deliver attractive returns to investors over the long term.
So why exactly can a good, well-researched property investment deliver a good return? One of the biggest appeals of property investment is the opportunity to leverage.
Put simply, leverage means the ability to borrow money to increase your buying power and through this maximise your returns.
Typically, investors can borrow up to 80 per cent of the value of an investment property so this can create the potential to generate returns on the 20 per cent that you contribute to a property purchase.
Why you need to invest?
Whether you would like a more comfortable retirement, a better work-life balance, to travel the world or simply have more funds to put towards those important things like family and health. It is universally agreed that you need to do more than rely on the old-age pension.
The most viable way to build wealth and generate a substantial income over the long term is through investing.
And one of the safest, secure and high performing assets to invest in is property.
Achieving financial freedom brings increased opportunity and opens the door to more options in life.
Yet, only a select few will use the power of property investing to really change their life and the lives of those they love for the better. Will you be one of them?
Investors that do their research, have a good understanding of their goals and take a long-term approach will therefore usually realise good results from investing in property.
But it is not just the opportunity for capital growth that makes property a sound investment for the long term.
The opportunity to leverage your investment is one of the most compelling arguments in favour of buying property – no matter where we are in the market cycle.
Planning your investment
Research essential for good returns
While it is impossible to guarantee that property will go up in value year on year, historically on average Australian property has doubled in value every eight to 12 years.
The rule of 72
For a simple way to work out how long it has taken a property or an area to double in value, divide .72 by the annual growth rate. If you want to know how many times it has doubled over a particular time frame replace the annual rate by the average annual rate over the same time period.
If you think a property will grow 10% per annum, just divide .72 by 10% and that tells you that it'll take 7.2 years to double.
Source: Michael Yardney, director of Metropole Property Investment Strategists
This, then, has the potential to create wealth if an investment property was held over the long term (20, 30 or 40 years).
It is easy to see the opportunities for significant capital gains but there is another equally compelling attraction to owning investment property: the potential for cash flow.
Leasing out your investment property means your tenants can help to pay off your mortgage.
There may be a shortfall between your rental income and your outgoing mortgage repayments.
However, if the rent increases over time, this shortfall may decrease and may eventually become an income stream.
If the rental returns outweigh the mortgage repayments, the extra funds can be channeled back into the loan to help drive down the principal sum.
While this may take some years, the result will be an income-generating asset.
Of course, there may be times when the property is not rented – you should, therefore, have funds available to cover this possibility.
Key to establishing your investment strategy is deciding whether you’re seeking cash flow or capital growth.
Property ownership is close to the hearts of most Australians and so it’s easy to understand why so many people consider property as a sound investment.
The beauty of property investment is its simplicity, however, to achieve the greatest success with your investment strategy you need to be sure of your objectives from the outset.
If there is one trap that new investors fall into, it is not having a clear outline of their investment goals.
Determining your borrowing capacity
The first step in successful property investment is to understand your financial position and borrowing capacity.
Investors need to have a clear understanding of what their goals are before plunging into the property market if they are to maximize their chances of success.
This will include determining if the goal is capital gain or generating cash flow if it is a long term or short term strategy, and what kind of financing is required.
Making any investment requires diligence but when you’re taking on debt, to help maximize your returns it is essential that you understand your true borrowing capabilities – or to be more precise, your true repayment capabilities.
One of the key reasons why a broker’s support can be so valuable is because there can be a big difference between what you can borrow and what you can actually afford to borrow in order to service a loan on an investment property.
Researching the market
The level of research conducted prior to buying a property can have a major impact on the returns you see from your investment.
Whether this is the first foray into property investment or you’re looking to add to your portfolio, you’re buying decisions should always be based on sound market research.
There is potential for investors to build wealth through owning property. Bricks and mortar have delivered solid returns to Australians for many years and it is an investment vehicle that is accessible to people from all walks of life.
But as with any investment opportunity, there are good property buys and bad ones. To ensure you achieve the best possible returns from your investment it’s essential that you do your homework before you buy.
It is also essential to remember that your return will depend on where your property is located – this includes access to transport, infrastructure, schools, hospitals and entertainment.
It is essential to research an area thoroughly before you make a commitment.
A property purchased in a good location, at or below market value, is likely to deliver better returns if held for the long term.
You also want to think about selecting a location where demand for property is strong and likely to remain strong, and where supply is limited.
This will help ensure good, lasting rental income as well as strong demand for your property when it comes time to sell.
Whether you’re looking for a nest egg for retirement, a boost to your income further down the track or simply improving your financial position, property investment has been a successful option for Australians of all walks of life.
Determining your buying strategy
Know what you want
One of the fundamentals of success in property investment is to understand your objectives before you make a purchase.
And the first golden rule of investment is to be realistic with your expectations.
If you expect to see your investment double in value in just a few years, you are likely to be disappointed.
True, some properties can appreciate very quickly but this is the exception rather than the norm.
And considering current market conditions in many locations across Australia, it might be unrealistic.
It is also important to remember that property is not a liquid asset – your money is tied up and can’t be released quickly.
It is therefore prudent to take a longer-term view if selling the property for a profit is your goal.
Investment Loan Pre-Approval
Before you jump into any property purchase, you need to have a good grasp of your goals, strategy and the eventual outcome you’re seeking.
So you’ve decided to invest in property and you’ve got your pre-approval from your lender – but where to from here?
Before ploughing into the market, it’s essential that you have a clear buying strategy in place.
And the reason for this is simple:
There are so many different options when it comes to a property that without a firm idea of what you’re looking for you may well end up buying something that ultimately doesn’t suit your unique investment needs.
Understanding your tax position
As well as capital growth and cash flow benefits, property investment may help improve your overall tax position.
Property is not just one of the safest investments open to Australians, it can also be tax effective.
The attraction of investment property is the potential for everyday Australians to build long term wealth through a stable investment vehicle. The ability to borrow a significant proportion of the property value not only helps investors get into the market, but it also offers excellent potential to maximize returns on their investment.
But the capacity to borrow can also offer investors tax benefits depending on the structure of their property finance, their income and the type of property they invest in.
Owning an investment property can be viewed in a similar light to owning a business.
If the investment property turns a profit – or if the net rental income exceeds the mortgage repayments – the owner will be taxed on the proceeds. However, should the investment property run at a loss over the financial year the owner could offset that loss against other income, reducing the tax you pay.
Unlocking equity for your investment
Existing homeowners have a distinct advantage over first-time buyers when it comes to breaking into property investment.
One of the biggest hurdles to buying property is raising a deposit, but existing homeowners may be able to sidestep this obstacle when it comes to purchasing an investment property.
Depending on how long you’ve owned your own home and how much it has increased in value over the years, there’s a good chance that you could have the deposit for your first investment property already locked away in equity in your home.
Equity refers to the difference between the value of your property and what you owe. As the value of your property rises over the years – and your loan decreases – the amount of equity will grow.
The good news for homeowners is that this equity can be released without having to sell your property.
You may be able to refinance your property at the current higher value, opening up additional funds which could be used as a down payment on an investment property – potentially saving years of saving for a deposit.
It’s important to note that you are effectively borrowing the deposit for your investment property against your own home and this will increase your mortgage repayments.
The interest you’ll be paying on the additional loan will be at your mortgage rate – which is likely to be lower than most other loans.