- Sponsored
- Money
- Insurance
- Terri Scheer
Five things to consider if you’re investing in property in the next 12 months
Sponsored by Terri Scheer
By Alexandra Cain
It’s fair to say we’re a nation of property investors, with Australian Bureau of Statistics data showing around 15,000 investment-property purchases are financed each month across Australia. Plus, more than 2.2 million Australians already own an investment property, accounting for 14.8 per cent of taxpayers.
Property investment can be a great way to build wealth if done properly.Credit: iStock
While it’s a popular way to build wealth, successful property investment requires careful planning, ongoing maintenance and a good understanding of risk.
Here are five essential elements to consider when starting out building a property portfolio.
1. Understand the property’s location is everything
When you’re buying an investment property, remember it’s a large commitment to a single-asset household, so you want to get it right.
“We recommend investing in metropolitan areas with a high demand for housing. Investing in property comes down to simple economics — you want demand to be higher than supply. You can still do well investing in regional areas, but you increase the risk of it not working out,” says Chris Magnus, partner and financial adviser with financial advice firm Ark Total Wealth.
Similarly, Marianna Agostino, founder of chartered accounting firm Conscious Wealth Creation, says a good grasp of the market you’re entering is vital.
“Research local developments and demographic trends to determine if the property you’re buying matches demand for housing in the area. Assess whether your potential investment could command a premium,” says Agostino.
Develop a perspective of how local property values and rental demand have changed over time in the area you’re investigating. Also factor in how any big future property developments may change supply-and-demand dynamics.
2. Work out how maintenance costs may impact returns
Maintenance costs can hugely influence investment-property returns, so think carefully about buying apartments that may be costly to repair.
“The expensive items are normally lifts, pools, gyms and 24-hour concierge services. Although they sound great, they all need to be paid for and can greatly affect an investor’s rental income,” says Magnus.
Some new investors mistakenly believe property investment becomes passive over time, with the asset essentially being set and forget. This maybe incorrect, says Agostino.
“It’s essential to remain involved. Understand who your tenants are and how they maintain the property and be sure to promptly address any issues they raise. Regularly reviewing and updating your property is part of effective its management,” she advises.
It’s also important to distinguish whether maintenance expenses are capital costs that add to the property’s cost base when determining any capital gain, or whether they are income costs that can be deducted against the asset’s investment income. An accountant with expertise in property investing can help you with this.
3. Appreciate the impact of future macro-economic events on the bottom line
Maintenance aside, many other factors can affect returns, such as interest-rate movements and the loan’s structure. It’s essential to model how these variables can impact your returns over time.
“Interest rates can change quickly, depending on what’s happening in the economy. It’s a good idea to stress test a new mortgage at 2 per cent higher than current rates, to ensure if rates do rise in the future, you can still afford the mortgage payments,” says Cory Behrens, a financial adviser with financial planning firm My Wealth Solutions.
4. Assess your financial situation realistically
Banks’ stringent lending criteria are an important indication about how much you can comfortably borrow. But you also need to be honest about what you can really afford in mortgage repayments to help reduce any stress of investing in property.
“Preparing your finances involves understanding your credit score and ensuring you have an emergency fund,” says Agostino.
Also consider your exit strategy before you commit to buying the property.
“Whether you want long-term capital growth, or plan to live in and improve the property before moving on, starting with the end in mind ensures your investment aligns with your broader financial goals,” she adds.
5. Treat your property as you would any other business investment
It’s a business investment, so let your head, not your heart, lead the way.Credit: iStock
This starts with accurately assessing the property’s costs and setting competitive rental prices.
“Be sure to get a number of quotes for any work you need to do on the property so you get good value for any services and products you need to keep it in a good condition. While securing long-term tenants may sometimes justify lower rent increases, neglecting to adjust rent appropriately can undermine your investment’s profitability,” says Agostino.
Vacancies and major repairs or upgrades are inevitable and being unprepared for these scenarios can strain your finances. “Establishing a reserve fund, funded by a portion of your rental income, can provide a buffer for these events, reducing the need to tap into personal savings,” she says.
Always keep in mind clear, long-term goals when investing in property. This means defining your investment objectives, such as working out the property’s potential to generate income versus capital appreciation.
Integrating these considerations into a broad, diversified investment strategy, both within your property portfolio and beyond, can help manage risks effectively and support the success of your property investment over time.
Terri Scheer is Australia’s leading landlord insurance specialist. For more information, visit terrischeer.com.au.
Insurance issued by AAI Limited ABN 48 005 297 807 trading as Terri Scheer. Read the Product Disclosure Statement before buying this insurance. Go to terrischeer.com.au for a copy. Target Market Determination also available. This advice has been prepared without taking into account your particular objectives, financial situations or needs, so you should consider whether it is appropriate for you before acting on it.
The information is intended to be of general nature only. Subject to any rights you may have under any law, we do not accept any legal responsibility for any loss or damage, including loss of business or profits or any other indirect loss, incurred as a result of reliance upon it — please make your own enquiries.