How to ensure financial return on your property investment in 15 simple steps
Purchasing an investment property can be one of the best ways to invest your money and increase your wealth. If you invest strategically, you could generate a return through passive income and tax breaks. However, a lack of research, knowledge and understanding of the real estate market could lead to poor financial gain. We’ve created a list of key factors to consider when securing the financial future of your investment property from choosing the right location to choosing an investment loan that is right for you.
1. Do your research
Always do your research before making any real estate or financial decisions.
When it comes to investing in property, there isn’t always a “safe option” financially, as it often requires a little financial risk to get the most return. Keep track of your investments by thoroughly understanding the property cycle and always remaining ahead of the market. You should also be open to negotiation with real estate agents for better deals.
2. Define your ideal tenant
It is essential to spend time getting to know any potential tenants, to determine whether they will be suitable for your rental property. Discuss how many people will be living in the house, whether they have stable employment or if they have lived in many rental properties previously. If they have a pet, ask whether they are house-trained.
While these questions may sound trivial, they could help you in selecting a great tenant who will look after your property.
3. Choose a popular location among renters
It is crucial to ensure the location of your investment property will attract tenants and meets the requirements of their lifestyles.
For example, if your ideal tenant is a student, the property should be close to a university or library, whereas, if they are a young family, the property should be near a kindergarten (childcare), primary school and/or local playground. This will help to increase the popularity of your property among property seekers with specific requirements.
4. Find a property that is close to public transport
Houses near public transport are a desirable feature for those who prefer a more sustainable transport option and do not drive. Finding a home on a popular tram, train or bus route will become a key selling point when you go to market your home for rent.
5. Seek advice from renters
One way to determine the suitability of a rental apartment is to talk to tenants currently living within the building. Ask them how they feel about the environment, the value for money and the attentiveness of the body corporate, as this information could give you a better idea of the quality of the building and its maintenance. You could also seek advice from successful investors who are experienced and understand the property cycle. Based on Urban data, here is what investors are looking for in Australian properties and which Melbourne suburb you should be considering.
6. Collate funds for your down payment
A downpayment is an initial payment in credit, cash or an equivalent form of payment, which goes towards the purchase of an expensive item such as a car or house. When purchasing an investment property, you will be required to provide a down payment – which could cost more because mortgage insurance does not apply to investment properties. There are also additional expenses for approval requirements and renovations; you can read them here.
7. Do your sums
Calculate the additional income you already have and match it with the amount you can borrow. Once you’ve found a property, you are interested in purchasing, create a contingency budget to allow for any renovation expenses (if renovations are required), the overall operational cost of running an investment property and a fallback for any unforeseen issues. We recently explored how much buyers actually need to spend on an apartment; you can read about it here.
8. Avoid overspending on your first investment
Investment advisors suggest that even if you are willing to spend a million dollars on an investment property - it is wise to select a property between the lower-midrange price bracket of $225,000. Keeping the range as low as possible also keeps you in a safe-zone as an investor, as it keeps you from losing money if you do not meet your expected profits. Did you know there are also ways you can invest in property with no money?
9. Consider investment loan options
When collecting funds towards your first investment property, there are several investment loans you should research before purchasing. Ideally, you may want to select a loan that provides you with the option to split the credit with a line-of-credit-facility.
10. Choose any investment partners carefully
If you wish to purchase your investment property with a friend or business partner instead of taking out an investment loan, you will need to choose your investment partner carefully. You should look to base this decision on their financial security, reliability, experience as an investor and the status of your relationship, as well as any financial implications of the partnership agreement. Before embarking on any financial venture with another person, it is very wise to get a contract drawn up to avoid any disputes in future (even if you don't anticipate any to arise).
11. Use the 1% rule
The real estate investment term ‘1% rule’ refers to the method investors can use to determine whether a property is worth investing in. The rule suggests that an investment property should have a monthly return of no less than 1% of the price it was purchased at, including the additional costs of renovations.
12. Understand the expense of hiring a property manager
Some property investors choose to serve as landlords, managing day to day operations and engaging with their tenant, whilst others prefer to hire an external property management service. A property manager will be available throughout the day to help your tenants with any requests, and most real estate firms also have round the clock care for renters should any issues arise. Using a rental agent is more of a time-saver than money saver as they do charge a fee.
13. Investment properties require you to fork out funds regularly
An investment property is not a one-off purchase and requires ongoing maintenance. Landlords (investors) are expected to financially cover issues that may occur in the house. One way to financially manage this is to create a budget or add your current household budget so you know where, how much and when to allocate funds when they are required.
Additional expenses include:
- Property tax (required)
- Homeowners insurance (required)
- Property management expenses (optional)
- Home-owners corporation fees (case-by-case)
- General upkeep costs such as cleaning and landscaping (required)
14. Research the risks
Purchasing an investment property is no different from any other business deal in terms of the associated risks which can lead to loss of money.
- Some of the risks include:
- Your property might not meet the 1% rule
- You may spend more money on the renovations than anticipated
- The local market economy could change, for example, the value of the suburb may decrease due to an increase in crime
- The property taxes may be increased
- An accident or disaster may occur and you may have to pay for expensive repairs
- You could have bad tenants with poor hygiene or that break your rules, resulting in cleaning, repair or eviction cost
15. Invest in high-quality fixtures
Before you buy property, you should look out for high-quality fixtures within the home or determine where you should include them on the property. Investing in high-quality fixtures may help prevent any incidents or damage, and limit the amount and cost of repairs required in your investment. It will also add to the design of the house and encourage tenants to take pride in and look after the property. Urban has created an inspection checklist that could help you determine what fixtures may need to be included, upgrades and what tenants will be looking out for in your investment property.