Investing in real estate isn’t just about finding a great property. You’ve got to make the numbers work or you’ll be seriously out of pocket.
Many investors choose to be a landlord in their own neighbourhood while others buy further afield to take advantage of strong capital growth and rental yields.
The first step is to establish your price entry point. You’ll usually confirm this with the lender who’ll provide your mortgage.
With your professional financial adviser, you should then establish the annual profit you want to make after loan repayments, taxes, and fees for maintenance and property management. Clarity here focuses your attention on properties that will deliver a profit.
Here are some tips and issues to consider as you chart your way forward.
- The bottom line – Successful investing is about making money, not finding properties that you personally love. Work with your accountant or professional financial adviser to establish the level of investment and the rental income you’ll need to make a profit. Losses can be written off against tax, and maybe that’s a good outcome for you. But as a first step, avoid red ink on your ledger.
- Capital growth – When considering properties, don’t forget to factor in their potential capital growth. That is, your profit from the difference between the prices you bought at and then sold for. You’re more likely to make money from suburbs with a history of consistently rising prices and strong buyer activity.
- Know your budget – Establish your spending power at the start of the search as this will ensure you don’t waste time on properties that won’t deliver the rental income required to make a profit.
- Build-in all your costs – All expenses associated with being an investor should be itemised. These will include not only mortgage repayments and maintenance costs but also fees for property management and marketing when you need to find new tenants. Add insurance and property taxes to those costs. Happily, many of these expenses are tax deductible.
- Emergency cash – On occasion, you’ll need to undertake a major repair, such as replacing a hot water service. While some issues will be covered by your insurance, it’s always good to have some cash on hand.
- Think outside the square – You don’t need to invest in your local area. Consider other parts of the country with a growing population and a strong economy. Cities and towns with strong employment histories, or a university town, are great candidates.
- Tenant appeal – Remember, your property must attract tenants. So prioritise real estate near schools, civil amenities, shops, and cafes and restaurants. You’ll pay a little more for the location, but your dividend will be consistent and higher rents.
- Stay in touch – Whether you take on the responsibilities of a landlord, or use a property management service, you should always be aware of your tenant’s intentions before a lease is to be renewed. Nothing loses money like an empty investment property.