Buying your first investment property is an exciting prospect, but for many, the process is often overshadowed by doubt or uncertainty. Firstly, consider why you want to invest in property and how it is going to help you achieve you achieve your financial goals.
Property investment is a vehicle for growth, so always keep your eyes on the future and work with your team to ensure you are constantly working towards a flourishing portfolio.
The most crucial piece of advice for buying your first investment property is to start building your team from the get-go. This includes a mortgage broker, an accountant or financial planner, a lawyer, a property manager, and most importantly, an excellent property strategist or property consultant.
Each member of your team will have their own separate area of expertise and will be able to offer advice across the full spectrum of fields related to property investment; a good team will help ensure smooth and rapid growth of your portfolio.
Remember you’re the boss, each team member should provide timely, accurate and personalised advice, but ultimately you make the final decision, don’t be afraid to chart your own path, the great thing about property is there more than one way to success, so do what make sense to you!
Starting off with a strong investment will have a huge impact on the continued growth of your portfolio, so consider the location of your first property very carefully. Investing in property is all to do with capital growth so picking a location that positioned to increase in value is the most important decision you will make off the bat.
We generally favour a city location over a rural one. Country property is illiquid, meaning it is hard to sell and market activity is generally low. It also has a limited rental pool.
City properties will often be far easier to rent. During a demand trough you may want to drop the rent you charge over the short term to attract a steady income stream and be well positioned to raise the rent back up as demand returns. In cities such as Perth, this flexibility will allow you to prosper throughout a long-term rental demand cycle.
From there, work with your property strategist to identify your best options. Know your budget (your mortgage broker will help here) and hunt around the most fruitful locations. Identifying social, cultural and lifestyle attractions in a suburb will help you differentiate between locations. Buyers favour these amenities and their long-term capital worth should never be underestimated.
Speak with your property consultant and consider off-market opportunities too. By buying off-market you are afforded the first look at floor plans, exclusive deals on rental guarantees, access to high value properties for little outlay, plus certain tax depreciation benefits and government incentives.
For more information, see our introduction to property investment in Australia.
Investing in new property has number of unique advantages over investing in older properties, which contribute to building a robust portfolio for long term growth.
New properties attract higher quality tenants at a faster rate than older property, reducing the potential for outlay during vacant periods (which can be lengthy and costly when trying to find tenants for older properties). They are also more energy efficient, and have significantly lower maintenance costs.
New developments are also often built to integrate with allied infrastructure, such as new transit, amenities and schools, making them highly desirable to owners and tenants alike (see above).
New properties provide a better investment income and have a higher claimable depreciation value resulting in better cash flow and may realise a higher resale value than older properties. It’s the depreciation based cash flow which may supercharge your outcome vs older properties (subject to individual circumstances).
If you already own a home but are looking to buy your first investment property, consider the value of your home as an effective way to get into the market. Equity is the value of the property minus any borrowings you have against it, and leveraging this equity can be hugely advantageous for buying your first investment property.
Using the equity in your existing home can mean you can borrow more money for your investment property. Or if you are more conservative, it may allow you to eliminate the need to pay LMI (lenders mortgage insurance).
Negative gearing is when the cost of owning your investment exceeds the income you earn from it – this allows you to deduct your borrowing. management and maintenance costs from your total income. So while you are earning a loss on your investment, this loss can be used to reduce the tax you pay on your income.
Again, building a supportive team along the way is crucial towards the growth of your investment portfolio. Your accountant will be able to discuss tax benefits with you and advise on your best options.
Depreciation may also provides tax advantages on newer properties, renovated properties with improvements like new kitchens, bathrooms and upgraded amenities. Generally these benefits are “front loaded” so although these items may be written off over quite a long period, much of the depreciation is accessible quite quickly, helping to improve your cash flow from day one on settlement.
It’s crucial in this case to get a comprehensive depreciation schedule done by a expert to your accountant ASAP! We can help organise such services for you as part of the Optimal property settlement process.
Property is a long-term investment, so work closely with your property strategist to make logical decisions that will help you build up equity and grow your portfolio.
We all read the papers daily talking in a never ending cycle of boom and bust – you’d believe that prices swing wildly day to day! – but the truth when you look at the figures is that property moves in long, strong cycles, which your strategist will be able to explain in plain english, showing you how to look at the key drivers off value rather than getting caught up in the daily shouting and yelling.
As billionaire investor Warren Buffet says, “the stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient” and we believe the same applies to real estate.
Your team should be there helping you every step of the way, towards your goals. If you have any questions about buying your first investment property in Australia, please feel free to get in touch!