If you’ve made the decision to buy an investment property in Australia, first of all, congratulations! Historically, property in Australia is an excellent investment and is an exciting venture for anyone looking to make long-term capital gains.
Property can be a powerful wealth builder for those who are smart about how they invest. Working with a competent and resourceful team of professionals is vital to the continued success of your property portfolio, but understanding the basics yourself is important too. To help get you started, here is a helpful guide on how to buy an investment property in Australia that covers everything from choosing where to invest, to considering off-market opportunities and tax benefits.
When it comes to investing in property, location is everything. Of course, this is the case for anyone looking to buy property, but is doubly important for potential investors.
If you are looking to invest in property in Australia, new property has a multitude of unique advantages over investing in older places. This is all about building a robust portfolio for long term growth.
New properties are usually built to integrate with allied infrastructure, such as new transit, amenities and schools, meaning they are in prime locations that are attractive to tenants. They also have lower maintenance costs, are more energy efficient and attract higher quality tenants at a faster rate than older properties, reducing the likelihood of financial outlay during vacant periods. All of these factors point towards better investment income.
New properties also have a higher claimable depreciation value resulting in better cash flow and may realise a higher resale value than older properties. It’s this depreciation-based cash flow which may supercharge your outcome over older properties (subject to individual circumstances).
Location is also a major factor to consider when choosing property. As a rule of thumb for investors, city locations are generally far more lucrative investments than rural properties. Although properties in the country are cheaper and can garner price growth over the long term, these attributes can come at a price.
Here at Optimal Property Group, we focus our time on major population centres (i.e. major cities) with diversified economic bases, growing population trends, and strong structural demand for housing.
Before you buy an investment property it is important to have realistic grasp of your budget and subsequent options. This the first step towards choosing the best location possible. From there you begin identifying your target areas; buy a copy of a property investment magazine and start getting a feel for which geographic areas interest you – remember, a decision made in haste is regretted at leisure, so be sure to thoroughly research a location before you buy, looking at a few key factors:
• Identify social and cultural attractions
• Take note of each and every positive (or negative) element of a location – write them all down on a legal pad if you have to!
• Keep track of developing infrastructure and how this might boost the value of an area in the future
• Chat with local councils in potential locations to find out what is being planned in the area infrastructure-wise
• Explore neighbouring suburbs – if somewhere is buzzing, the surrounding suburbs are usually next in line for growth
• Take a look at Census data for different locations to gain a more in-depth insight into how a location is changing. Realestate.com has a great ‘Invest’ function that gives you access to lots of valuable data
Sometimes the best properties are scooped up before their official release date by investors with “the inside track”. How you ask? Off-market opportunities.
An off-market property or development is one that is in fact for sale but is not being advertised on general portals such as realestate.com, but is being released only via approved developer partners who can pass this information onto their clients.
Why go off-market? Well, there are a number of different advantages these developments have over what you usually see via the usual outlets.
• You are afforded the first look and choice of floors plans
• Exclusive deals on rental guarantees may be negotiated for you by your property consultant
• Furniture packs allow you to have a property ready for leasing from day one, with a bespoke styling solution appropriate to the area and target tenants. This is crucial if the apartment is interstate or international!
• Full payment for the property does not need to be made until the development is complete. This means you can essentially secure a high value investment property for a minimal initial outlay – the 10% deposit.
• You can also lock in a price at the current market value for a property that will be completed in the future, a potentially lucrative advantage in a market which may rise over time.
As we’ve mentioned before, working with a competent and trustworthy team is vital to the success of your property portfolio, from its inception right up until your exit strategy. One of the key figures that will guide you along the way is your property strategist.
Your property strategist is your main adviser on where the best value properties may be found and will be able to analyse information and provide guidance across a broad range of sectors within the realm of property.
Your strategist will be vital from the early stages of investing – things like choosing a property, exploring off-market opportunities, analysing the market and negotiating leases.
In the middle phase of your property journey, your strategist will guide you through the different stages of diversifying your portfolio – assisting with the sale of assets and analysing the viability of new investments.
Finally, in the latter stages of your property journey, your strategist can advise you on your exit strategy – whether you want to maximise income, create a generational legacy, realise capital gains or downsize into a more appropriate home. Your strategist will be there every step of the way, helping you achieve your financial goals.
After working with an experienced property strategist to guide you through the earlier stages of your investment, you will want to look at financing options for buying your property.
A good mortgage broker will be another important figure throughout your investment journey. A broker acts as the link between yourself and potential lenders; they will have comprehensive insight into the different loans available from various lenders and will be able to identify the most suitable options for you.
As with your property strategist, your broker will be a key figure throughout many different stages of your investment portfolio, be it your first property or your tenth. They can advise you on how to structure your loans to help you leverage into multiple properties, which is extremely important when looking to diversify your portfolio.
When the cost of owning an investment property exceeds the income received from it, the ATO allows investors to offset the loss against their income. This is called negative gearing. Essentially it means that while you are earning a loss on your investment, this loss can be used to reduce the tax you pay on your income.
You may be able to deduct expenses such as loan interest and setup costs, in addition to insurance, repairs and property management fees.
While these factors are some of the key benefits commonly associated with property investment, when weighed against the advantages of free cash flow, negative gearing may not always be your best option. Be sure to discuss with your accountant the different tax benefits associated with property investment. They will be able to advise on your personal circumstances to help you make smart decisions.
We here at Optimal always look to find properties that can generate free cash flow as soon as possible. Remember the goal here is to create tangible wealth, not just minimise tax!
The decision-making processes around buying an investment property should be pragmatic and well thought out, especially when considering potential tenants. As an investor, you need to constantly be thinking about your target market and make purchase decisions accordingly.
This will influence different factors about the property you choose, including:
• Location – proximity to schools, universities, CBD’s, social attractions and infrastructure
• The property – space, number of rooms, amenities, integrated facilities (gyms, pools, tennis courts etc), accessibility for older tenants, access to the National Broadband Network (NBN), off-street parking
• Furnishings – your target market will have a big impact on how you go about furnishing the property: whether it needs to be furnished and what kind of furniture packages you might opt for
Your property manager will be a key figure in your investment’s tenancy. They essentially look after rent, accounts, leases, inspections, disputes, issues and paperwork. If you develop a good relationship with a property manager, you can have them manage your portfolio as it grows – having all your property managed under one roof can be extremely useful!.
Your strategist is also very important in some of the early aspects of making decisions about your target market (such as considering different locations and gaining access to off-market opportunities).
For more information on the key figures who will guide you on your way towards a prosperous investment portfolio, see our article on how to build your team.
Risks assessment is another key factor in property investment. The whole process may seem a little daunting, but being aware of different risks can help you avoid fatal pitfalls. And remember, your team will be constantly assessing and managing risks in different areas for you. That’s why working with a trustworthy team of specialists makes all the difference!
Here are a few key risks that you might like to know:
• The initial and ongoing costs for purchasing property is usually high
• Property is harder and can take longer to sell than other financial assets – i.e. it is not very ‘liquid’ especially in regional areas or during times of economic uncertainty such as volatile interest rate markets (that’s why we believe investing in major cities is safest !)
• There can be costly ongoing maintenance issues with a property
• Rental circumstances can change, meaning you may still be paying to cover expenses while receiving no income from the property
• Property value can decrease too, especially in areas with a single industry demand base such as mining (again, in this respect, cities are generally much more stable)
• Bad tenants can cause never ending headaches, so formulating a plan to attract and hold a high quality tenant is crucial.
• Given the relative cost of a property it can be a very large weighting in your asset base.
Remember, your team should be there helping you every step of the way, towards your dreams. If you have any questions on how to buy an investment property in Australia, please feel free to get in touch!