When it comes to building a retirement nest egg for the future, property is still regarded as one of the safest long-term investments.
While some investors may want to buy a property and rent it out straight away, others may choose to live in the home while they renovate it. Investing in bricks and mortar can be a great way to create wealth, but there are some golden rules to consider before taking the plunge into property investment.
1. Know your budget
Before investing in property it’s vital to have a thorough understanding of your cash flow. Also, ask your bank for a pre-approval of your investment loan, so you know how much you’re able to borrow before you start hunting for properties.
2. Don’t underestimate ongoing costs
Make sure you budget enough for rates, insurance and general repairs. And when you have purchased your ideal investment property do what you can to prevent costly maintenance issues arising, such as replace ageing taps.
3. Buy in a growth area
Try to choose an investment property in an area where there is strong demand for rental accommodation. Buying a property close to transport, universities and schools will make it more attractive to renters.
4. Be realistic about your investment goals
Are you looking for fast capital growth or wanting to hold the property long-term? During boom periods, it’s much easier to renovate properties and turn them over for a quick profit. In slower economic times, it may take many years to achieve the same growth.
While a home on a steep block may have a stunning view, it could be a nightmare to renovate due to retaining or excavation costs
5. Build sweat equity
Paying tradesmen to renovate your investment property is costly. If you’re prepared to get your hands dirty you can save money and increase your profit margin by doing the work yourself.
6. Look for liveable not luxury
Remember a rental property only has to be clean and functional. Don’t get sucked into buying a property simply because it has a stylish interior.
7. Buy with your head not your heart
When house hunting it’s very easy to get caught up in emotions. While a home on a steep block may have a stunning view, it could be a nightmare to renovate due to retaining or excavation costs. Be sure you weigh up the pros and cons.
8. Think carefully before negative gearing
If your repayments on the investment loan won’t be fully covered by the rent, your property will be negatively geared. While this can have tax advantages, it can also lead to financial stress if you don’t have enough cash flow to cover the loan repayments, rates or body corporate fees, so consider your budget carefully before buying
9. Still paying off your own home?
It isn’t necessary to have your own home fully paid off before buying an investment property, however it is important to be comfortable with your current debt levels. Ideally you’d want to have a large portion of your own home paid off and other debts, such as credit cards, under control.
10. Get a building inspection
Before signing a purchase contract, take the time to understand the building report to avoid expensive repairs down the track. Termites are one potential problem to watch out for.
by Tony Rigby, AMP Financial Planner