5 Steps to Property Investing

A Quick Guide to Property Investing

Buying real estate, whether you are buying the family home or an investment, is one of life’s most important financial decisions. However, in buying an investment property, it is very important to remember that you are making a business decision.  You are buying the investment property because you expect it to appreciate in value.

Common mistakes made in investing are that people look for the same things they would want in a home or buy in their local area so they can ‘keep an eye on it’. Buying an investment property should be part of a wealth creation strategy and be approached as a business and investment decision from the very beginning.

5 steps to property investing

The following 5 steps make the investing in property decision a simple step by step process

1. Decide on your Investing Strategy

The questions to ask yourself are-  What is the purpose of investing in property. What is the ultimate aim of the investment. What is the time frame for the investment. The importance of this first step clears in your mind the reason and the ultimate goal for investing in property. Will you buy in your name only or buy in both the partners names has to be considered keeping in mind asset protection and tax benefits. It is important decide on your strategy before you start you search.

2. Capital Growth or Rental Income

There is two ways to make wealth and generate income from property. The rental income provides a regular cashflow and is measured by the Rental Yield. The increase in value of the property over time is called Capital Growth. Some properties provide good rental returns but have little potential for capital growth; for some the converse is true. To determine your Income or Growth strategy other factors come into consideration like Income Tax benefits and age to retirement. I personally feel a high growth/ low yield combination generally suits high income earners better due to potential tax benefits if the interest payable on the loan is greater than the rental income. By contrast, a low growth/ high yield strategy is likely to suit those on lower incomes as the extra rental income may allow them to buy more properties in a shorter time frame.

As part of the RBA Property Investment solutions for our clients we prepare a investing strategy to suit your income and lifestyle. This investment strategy is then reviewed annually to ensure any changes in your circumstances are accounted for.

3. Which Type of Property- Unit or House

The type of property which best fits in with your investing strategy is driven to a certain extent by step 2 above. However when deciding on whether to buy an apartment/ unit or a House/ townhouse, things to consider are Brand New/ old, metropolitan city v regional centers, and off the plan v established properties. Apartments generally offer a cheaper entry point than a freestanding house and provide a higher rental yield. Houses on the other hand generally provide a stronger capital growth and lower management costs. If buying off the plan you can take advantage of stamp duty savings and have a longer to save up the deposit.

4. Get Pre-Approval for Mortgage Finance

Using your investing strategy above if you are buying in only one name- generally the highest income earner, it is important to find a mortgage loan broker. Make sure you find a mortgage broker who understands investing in property and himself is a property investor. It is wise to choose a quality reputable mortgage broker and I recommend RBA Money as they understand investment property  and have solid experience in helping investors. Normally get an investment loan pre-approval from two banks which support property investors. The finance approval process is very simple and easy with you not having to go anywhere. RBA Money Loan brokers will come to see you. Once you have a loan pre-approved then you have a budget to start searching for properties which fit your investing strategy above.

5. Prepare a Property Investing Spreasheet

Using the information collected above, open up Microsft Excel on your computer. First input the loan pre-approved amount and use that as the value of the investing property. Work out the rental yield which is calculated by taking the net income (gross income minus property expenses like rates, body corporate, rental management fees etc) divided by the purchase price (market value). The rental yield % should be compared with the Interest rate %. The difference between the two is gap which you will need to cover from your savings. Depending on your income levels, benefits like negative gearing and depreciation allowance will reduce the net outlay from your pocket. RBA property will provide a detailed  property investing spreadsheet for each of their clients clearly showing your weekly net income and expense projections and providing the net cash flow income or shortfall on a weekly basis. This process eliminates to a large extent any surprises effecting your investing decision and give a 5 year forecast of the income and expenses for the investment property.

Make sure you do your homework before investing in property. Speak with the experienced RBA Property consultants to develop a customised property investing strategy for you.

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