BUYING A PROPERTY THAT REALLY PAYS
To be a successful investor, you may need to think outside the box to get started. The first property I brought was a run down inner city terrace for $91,000. I cleaned it up and rented it for $100 a week. Even though it wasn’t a palace, it was a lot nicer than the $40 a week apartment I was living in. But I choose to stay in the apartment for another two years to maximise my cashflow so I could get a foothold in the market. Looking back, I’m glad I made that sacrifice. A few years later I sold the terrace for $250,000.
The lesson here is that most markets are growing faster than we’ll ever be able to save. So the question is not “Should I get in?” but “How can I get in?”.
Most Australian’s make more only from their property investments each year than they do from their full-time jobs. With many areas of this country boasting median prices of more than $800,000, and an average capital growth rate of 7 per cent over the life of the property. That spells a $56,000 annual capital growth gain, which if you own home will be tax exempt. Therefore, if you get a position to buy your home and then buy an investment property or two, it can be a life-changer if you do it right. I’m a fairly conservative and a risk-adverse investor, as are our advisors, and I don’t think you need to be a huge risk-taker or to borrow beyond your means to create a profitable portfolio. So here are a few tips on how to maximise your property investment and ensure you do it safely and with minimum stress.
Research. It’s worth knowing your stuff when it comes to real estate. A great buy in the right growth precinct can make you a considerable profit over a decade. Be prepared to put in the effort and research both areas and property values. Almost all the information you need to is available via the internet, so there’s not execute for not being prepared.
Finance. Before you start looking, meet a finance expert and get yourself financially pre-qualified and structured for this exercise. Not only will this save you money but it also allows you to move quickly when you identify that great buy in the market, rather than having to wait and get finance approved. Real estate agents will also work with you more effectively if they know you’re ready to go when the right investment comes.
Define your purpose. Whilst your buying to make money and set-up your life or your families future, define your purpose. Historically property goes up, capital cities across Australia and especially Victoria are seeing an under supply and demand for homes like never before. This can offer both an opportunity to structure your investment to reduce your tax rate or increase it, both of which you need to be positioned and educated on, before you buy and after you sell.
Buy for growth. Some people get excited when one investment yields (Rent return) a 5 per cent return instead of others that offer a 4 percent yield. In my experience, it’s super capital growth the makes you rich in realestate and that is rarely the same properties that offer the same yields. While the rental return is relevant in so far as it has to repay your loans, your real payday will come when you find a property that rises in value at 9 per cent a year rather than 7 per cent a year. Over 10 years, that can give you a huge wind fall.
Buy property you can drive past, ideally in a major city. Avoid buying an investment property in an area you don’t know. Buying apartments off-the-plan in an unfamiliar area form a sexy marketing brochures is a recipe for potential disaster. If you live in a major city you don’t have to look elsewhere, if you live in a regional area you may want to consider buying in the closet major city. The capital growth comes mainly from capital cities and the areas which surround them. Get close to the CBD and the water. Buy with 20 kilo meters of a major CBD and, if possible, near beaches or waterways. Enough said, this will yield you the strongest growth.
Use both your head and your heart. I disagree with many experts who say, “Don’t be emotional when buying an investment property”, I say, get emotional and buy a property the excites you. Remembering that your greatest return and capital growth will come when you sell it for a huge premium, find properties that will give you not only a decent rental return but will also excite future home buyers.
Pay above the median price (trust me). Be prepared to buy up. By definition, the average price represents the average house. If you want to buy or build a superior home, you’ll be required to pay above the median. It’s important to remember that if it’s in a high-demand area, the better the property your buy or build, the better capital growth you’ll get. Prime locations are always prime. Try to buy something that’s in location to really secure growth and resale demand.
And finally, things to avoid, main roads offer value for money but rarely have the same growth as quieter streets. Serviced apartments usually can only ever be sold to another investor. So you cut out 60 per cent of your market when owner-occupiers can’t buy your investment. Often these provide good yield and offer a lower maintenance cost, but offer lousy growth. Commercials buildings refurbished to residential almost never work. Buy purpose-built residential houses, and avoid office buildings that have been recycled to residential.