When considering property as an investment, you must be practical. Property only serves as a good investment when it helps you achieve your financial goals. And because each property has different things to offer the would-be investor, you need to know what you are getting into, and why.
At its most basic, a property investment offers cashflow, capital growth and tax benefits. But it is rare to find a property that offers a great deal of all three. Usually you will only know a property offered you all three, some years after the purchase. After all, that’s the best time to assess how good the capital growth has been.
The problem is that most investors new to the property market make their buying decisions based on hunches, guesses and emotions. Crystal balls, anyone?
It is not enough to know – or think you know – which suburbs are about to rise in value. Nor to pick a property which must surely be a good investment because it is the sort of place you would like to live. If you choose your investment based solely on such considerations then you are a speculator. And speculators leave themselves open to risk.
The property investor needs to take a careful look at the numbers that can be seen at the time of purchase: cashflow and tax benefits. Unless you are a high income earner, cashflow is likely to be your most important consideration. Basically, the cashflow offered by a property – how much your tenants will pay you for the privilege of using the property – dictates how easily you will be able to afford that property as an investment.
Security in property investment is first and foremost a matter of affordability. If it is easy for you to afford your property, then you will likely be able to hold on to it through interest rate rises, fluctuations in property values, fluctuations in rental return, and fluctuations in your personal circumstances.
Buy a property you can only just afford to hold, and you are building a house of cards. The fundamental principal of property investment is that you must be able to buy and hold indefinitely, not selling your asset until it suits you. That way you can achieve the capital growth that makes the whole effort worthwhile.
For many first-time investors, the property they need to buy as an investment is vastly different from anything they would consider living in themselves. Most investors need a small house or apartment with a modest price tag. Nothing flashy. Nothing beach front. No fantastic views, no spacious living, no ‘endless potential’.
The investor requires a property which has:
• Low Tenant Vacancy Rate
• Secondary Market (will sell easily)
• Low Maintenance
• Close to Infrastructure.
• Depreciation and building write-off allowances
• Scarcity of available land for further development
• Matches mortgage valuations
• High yield
• Right location
Tax benefits – while less straightforward than the simple equation of rent in, property expenses out – are also a determining factor when it comes to affordability. Before purchasing, consider having a depreciation schedule done, to go with your valuation and rental appraisal.
Armed with an accurate picture of the income you can expect from the property, ask yourself these questions: will this property be easy for me to hold on to for as long as I want. Can I hold it if interest rates double? Can I hold it if rents fall by 30%? Can I hold it if I or my partner lose a job?
If the answer is yes, then maybe the time has come for you to be a property investor.