Fundamentals of Property Investing
“Begin with the end in mind”- Stephen Covey
If we are to follow the advice of world-renowned author of 7 Habits of Highly Effective People, we must know what our objective is before we begin the process of property investment. Having this end-goal in mind, it is then possible to work backwards from there to develop a property investment strategy which will give you the best chance of success.
Of course, if you are investing in property, your long-term goal will be to grow your wealth. This might be achieved by buying a property to rent out, by buying and renovating a property, or by purchasing your property at a great price and holding onto it until such time as prices in the area rise. Whatever your approach, there are 5 basic fundamentals to consider when investing in property. Here, we’ll cover each of these, to help you better understand successful property investment strategy.
- Property cycles
Understanding property cycles can be a tricky business, especially if you’re yet to enter the property market as an investor. However, having a working knowledge of this fundamental factor can mean the difference between success and failure in the property investment game. Be sure to do your research – or consult with someone who will do it for you – to understand the highs and lows of the property market in the area you’re hoping to invest.
Buying at the height of the price cycle is likely to cost you money, unless you’re willing to hold on long enough for that cycle to come full circle once (or twice) again. Many investors choose to buy property when prices are lower and hold on to their investment until such a time as it makes sense to sell. Whether you’re hoping to rent out or sell on, it’s important to understand where the property price cycle stands at any given time.
- Interest rates and taxes
Where are interest rates right now? Are they likely to fall or rise in the near future? Now is one of the best times in history for property investors in Australia, with interest rates at an all-time low. In fact, we’ve now had continually record low interest rates for some time. The interest you pay on your investment will affect your returns, so consider whether your lender will offer you a fixed or variable rate, and weigh up the pros and cons of each. Securing a great interest rate is crucial to ROI when it comes to property investment.
Another important factor to consider are taxes and tax concessions related to your property investment. Last year, the government changed the rules regarding claiming depreciation on investment properties, which has affected many investors negatively. Be sure to be across your tax obligations and the concessions/deductibles that you’re eligible for.
- Risk management – have a buffer
Any investment has an inherent risk attached – it’s a fact of life when it comes to investing. Of course, with risk comes potential for reward, and this is why we invest. Being a savvy property investor means being prepared with a risk management strategy, and that means having a buffer. This involves not overextending yourself in terms of borrowing or spending and being prepared for a hike in interest rates or for unexpected expenses such as property repairs. What about negative gearing? Would your property investment still be viable if you became unable to negatively gear? The policy around property investment is in a constant state of flux, and while there are no current plans to put a stop to negative gearing, it’s a conversation that arises time and time again within government debates. Investors who are prepared for a rise in their costs or a change to policy, and those who can weather any storms in terms of higher interest rates – for as long as it takes – are those who are most likely to succeed.
- Supply & demand
The property market, like any other market, is dependent on supply and demand. If the market is flooded with properties due to a recent development release, for example, prices are likely to be lower for buyers. On the other hand, when there is a shortage of properties (especially in major cities), prices will tend to rise. The good news is that most Australian capital cities face an ongoing shortage of property supply. How is that good news, you ask? Well, it means that prices are unlikely to drop suddenly, thus making your investment unviable. It does mean that you’ll need to do your research in order to find a property that’s going for the right price. Having an expert by your side, someone who knows the ins and outs of the property market, is the key to coming out on top with a great property find.
- Growth drivers
There are a few key areas that drive growth in the property market. These include population growth, infrastructure spending, and jobs growth. Is there an area which is expected to grow in population over the next 5, 10 or 20 years? As the city centres become almost impenetrable for first home owners and renters alike, families tend to find new hubs to base themselves. Great transport links and amenities are fundamental to the growth of an area, so look out for planned infrastructure spending which is likely to appeal to renters and home buyers over the coming years. Getting into these areas early can mean lucrative returns once these spots take off with new residents.
So, remember, before you complete your purchase ask yourself, ‘What if I am wrong?’ Can you live with the consequences? Do you have a strategy which protects you against unforeseen expenses or lower than expected returns? Keeping these five fundamentals in mind will ensure that you’ve got the best chance of succeeding in property investment. To fail to plan is to plan to fail, as the saying goes.
Want expert advice and years of experience on your side? Get in touch with Porters House and let us take care of the hard work for you.