1.  Correct property selection

Investing in real estate is usually all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you will make, so buying at the right price is absolutely critical.

Unlike buying shares where the value of a company is transparent, real estate is more difficult to price. This however provides you with the opportunity to acquire an asset below its real market value if you are patient, knowledgeable and get the right advice. The key for you is to do your research, work out what everything is selling for in and around the area. Never consider purchasing real estate in an area that you are unfamiliar with or have not done research on, particularly when you are approached by developers marketing offshore properties or off the plan, as many of these real estate marketing companies are paid very high commissions resulting in the price of the property being hugely inflated. If you do find a property that you like and are unsure of its real value I would suggest contacting me as I have a number of tools and access to experts to validate its current value.

Whatever you do, never make a decision to buy an investment property based on getting a tax deduction – always focus on making the right investment choice.

Ensuring that you have a steady rental income stream is also vital because this cash flow will make the holding of the asset more affordable and provide income.

Different classes of residential property – home units, houses and land – can outperform each other over time. For example, vacant land will provide no rental income but may appreciate more quickly if purchased in an area with limited supply. Investing in a home unit might mean less maintenance costs than investing in a freestanding weatherboard house. Some areas offer higher rental yields, but it is important that you do your homework as often these properties provide lower capital growth opportunities.

It is also important that your property suits the demographics of renters in the area. For example, if it is near a university more bedrooms will be in greater demand than a big backyard for kids to run around. A family home that is close to schools and parks on a quiet street will be more desirable than a property on a busy road.

2.  Cashflow

Investing in property is a proven path to long-term wealth, however you should consider it a medium to longer term type of investment, so you’ll want to make sure that you can afford to maintain your mortgage repayments over the long term. You will not want to have to sell your investment property until you are good and ready and if you were to encounter some financial stress, this could force you to offload the property at the wrong time.

Once you own an investment property it can be quite inexpensive to keep it and service the loan, that’s because you earn rent and get a possible tax deduction on many of the expenses associated with owning the property and remember that over time rents tend to increase as does your own income – so expect things to get easier over time.

Make yourself aware of taxes involved in property investing and add these into your calculations. Advice from your accountant is vital in this regard as these can change over time. Stamp Duty, Capital Gains Tax and Land Tax all need to be taken into account. Remember that interest rates can vary over time but the good news for property investors is that in times of rising interest rates you can normally expect to be able to increase the rent.

You should know also that banks only take only between 60%-80% of the rental income into account when working out whether you can afford an investment loan. This is due to costs like letting fees and vacancy rates, which you will incur, consider using this as a rule of thumb for you too. If you need help to work out the cost of holding an investment property please contact me.

3.  Property management

A property manager is usually a licensed real estate agent that is a professional in their field, their job is to keep things in order for you and your tenant. They can help you with ongoing advice and help you manage your tenants and get you get the best possible value from your property, a good agent will let you know when you should review rents and when you shouldn’t.

The property manager should be able to give you advice on property law, your rights and responsibilities as a landlord – as well as those of the tenant. They’ll also take care of any maintenance issues, although you should approve all incurred costs (other than certain emergency repairs), in advance.

The property manager will also help you find the right tenant, conduct reference checks and make sure they pay their rent on time. Your agent should make regular independent inspections of your property to make sure that the tenant is looking after your investment.

The good news is that the cost you pay to your managing agent is usually a percentage of the rent paid, is deducted from the rent and can be deductible.

4.  Work with professionals that understand the markets you are buying in

Consider what other properties are available in the immediate area. Accessing independent information from a source such as Core Data can give you information on average rents, property values, demographics and suburb reports. Using professionals such as buyer’s agents who can do all of the above research on your behalf.

You can access a lot of information on the Internet but understanding what it all means can be a challenge. Contact me and I’ll be happy to provide you with access to the best professionals in their fields to help you navigate the huge amount of data available.

5.  Correct mortgage selection

There are many options when it comes to financing your investment property, so get sound advice in this area as it can make a big difference to your financial well-being. It is surprising how many people spend too much time researching mortgages in an attempt to save a few dollars a month, rather than spending that time on researching their local real estate market where much bigger gains can be had. I’ve seen some very smart people haggle passionately with a lender over a few dollars a month on their home loan, only to pay $100,000 over the reserve price at auction for a property.

Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a trusted financial advisor. I always avoid mixing up investment property loans with your home loan, they need to be separate so you can maximize your ongoing taxation benefits and reduce your accounting costs.

Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rates loan at the right time can really pay off. Remember that rate usually rise in line with property prices, so increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front.

Most investment loans should be set up as Interest Only (rather than Principal and Interest) as this increases the tax effectiveness of your investment, particularly if you have a home loan, but make sure you try and factor in flexibility. The reason Interest Only loans work well for investment properties, is that with a Principal and Interest loan, your negative gearing benefit reduces as you pay down the amount of your loan.

6.  Accessing existing equity

Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage. For example, if your home is currently worth $1,000,000 a bank will generally lend you up to 80% of the value being $800,000, and if you have $250,000 remaining to pay off on the mortgage, then you have $550,000 worth of equity. Also, using the equity in your existing home can allow you to borrow more money for your investment property, which may increase your tax deductions.

7.  Property inspection

Even with negative gearing, needing to replace the roof or hot water service in the first few months of ownership could make significant difference to your profits and really damage your cash flow.

It is therefore advisable to engage a professional building inspector before you purchase to conduct a thorough inspection of the property to find any potential problems.

It is also wise to use qualified trades person who are licensed to carry out the work and who have adequate insurance to protect you against poor workmanship.

It’s not always a bad thing to buy a property that is not in peak condition because you get the opportunity to improve the value of the property by refurbishing and this can increase your returns for both capital growth and rental income.

8.  Long term

Remember that property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better and as you build up equity then you can consider purchasing a second investment property – try not to get too greedy and find the right balance between financial stability and still being able to enjoy life. Financial security is very important but life is not just about numbers.