The Golden Rules of Investment
There are several golden rules of investment that all astute property investors follow. Some of these are shared below.
Evaluate market cycles
The current market cycle of the city in which you wish to invest in has a significant impact on the performance of your investment.
Statistics and Demographics
Study the regional and local demographics and statistics of your chosen suburb or shire. Population growth, economic growth, land availability, current and projected levels of construction, proposed urban development and/or improvements by local and state governments, and rental vacancy rates can have a big influence on future capital growth.
Mode of Living
Determine the preferred mode of living by the owner occupier. If the owner occupier in your selected region prefers a free standing home, then don’t invest in a one bedroom unit on the 17th floor! By following the owner-occupiers preference you will minimise vacancy rates and maximise the price when you come to sell, as your property will attract the wider market. Never buy a property that has been designed and built solely to attract the investor.
Establish the market value
Compare the asking price with similar properties for sale in the area and always have your lender organise an independent valuation.
Assess the tax effectiveness of your chosen property
The wholesale construction cost and fixtures & fittings allowance in particular, can vary considerably from property to property and can have a big effect on your after tax cash flow. There is no point determining these deductions after you have bought the property, it will be too late. Of course, tax advantages will only apply if you are an Australian tax payer.
Compile a financial analysis
‘Crunching the numbers’ and allowing for a number of variables, is essential in determining the likely financial outcome of your proposed investment. It is extremely dangerous to invest in property without fully understanding the financial consequences. Know the facts and figures before you decide to purchase – allowing for varying interest rates, capital growth projections and vacancy rates.
Leverage your way to wealth
Using the equity you have accumulated in other property (e.g. family home or another investment property) to fund the deposit on your investment property rather than using cash reserves, can have a positive impact on your rate of return. As the value of your investment grows, you can then release the security on your family home (or other property) to fund another. If you currently don’t own a property, consider paying a cash deposit, later using future capital growth to fund a second property.
Decide on appropriate funding
The term of the loan, the interest rate, the ‘gearing’ level, whether fixed or variable, line of credit, split loans, interest only or principal & interest – will impact the financial performance of your investment and need to be examined in detail.
Open a separate account
Even if you have multiple investment properties, always have a separate account linked to the mortgage for each property. All income, outgoings and tax concessions are then directed to this nominated account.
In who’s name and what percentage?
Your contract to purchase will allow you to nominate ‘Tenants in Common’ and give you the option to vary the percentage of ownership between you and your partner (or other individual). This can have a significant effect on tax concessions. Allow for these variables in your financial analysis and you will optimise your investment for maximum return. (You will need to check with your accountant and/or solicitor before making a final decision).
Apply to have your taxation instalments varied
Check with the Australian Taxation Office and your accountant, if you are able to vary your taxation instalments to reflect your new tax position after buying your investment property.
Select a competent property manager
An efficient property management company can make the difference between a smooth, trouble free investment and an ‘always a problem’ experience. Good property managers will advertise your property promptly, advise you on correct market rental, screen potential tenants, examine past rental references, conduct regular property inspections, pay rates and insurances on your behalf. We can help you find a suitable property manager in your local area.