This decision is probably the easiest and the most obvious, but why are you looking to buy property?
Are you looking to purchase an investment property or are you looking for somewhere to live?
The distinction between these purchases comes down to emotional versus business drivers. An investment property is a business decision. Buying your home is an emotional decision. Some of the pre-requisites may be the same, but when buying property as an investment, you are interested in the best possible return and capital growth, not how good your lounge will look near that floor to ceiling window.
An investment property is one that you purchase knowing that you may never live there. The research you do for an investment property is therefore quite different to what you would do for your home.
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Golden rules of buying investment property
Rule #1 Capital Growth
Put simply, capital growth is the increase in the value (equity) of a property - the capital gain is the difference between the purchase price and the selling price for a property. It is reliant on economic factors such as supply and demand, rental vacancy rates and sound economic growth at a local and national level. There are two ways to increase the equity of your property:
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Buy property in an area that has strong capital growth
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Reduce the debt on the mortgage attached to the property
In short, try to buy somewhere where your property is always in demand and therefore most likely to always be leased.
Rule #2 Is it worth the investment?
Rental yield percentage considers the property purchase price v the price of rent. For example, if the asking price of a property is $300,000 and the rental income is $300pw, you can work out that the percentage return of the property will be around 5.2% ($300 x 52 weeks = $15,600. $15,600/$300,000 x 100 = 5.2%).
Considering that around the 4.5% to 6% is considered a good return, that would be a pretty good investment property.
Always ask what income the property will earn. If the sums aren't good, find another property.
Rule #3 Can you afford to buy?
Affording property is only one piece of the puzzle. Other factors to consider are:
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Can your current cash flow handle the maintenance of the property? Alternatively, does the return from the rent cover all maintenance costs, or will you have to supplement the running costs?
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The amount of debt you currently have - if you have substantial debt, this will inhibit how much you can borrow for the investment
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Your current tax bracket - this will affect the amount of tax credit you will receive on any given investment property because the lower your tax bracket then proportionally the lower your tax credit or refund will be.
Rule #4 Location - the right property in the right area
Find a location where real estate is experiencing strong capital growth, and where people want to live. Sounds simple doesn't it? Some things to consider:
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How close is public transport?
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Do the amenities appeal to the type of tenants that are in the area?
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Is there a booming suburb, regional city or area with a unique attraction which will make people want to live there?
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Is the suburb near other areas that have recently experienced strong growth?
Rule # 5 Do people want to live there?
If no one wants to live in your investment property, you're in trouble. Rental income is the lifeblood of a real estate investment. A property may increase capital gains, but how long will that take? Can you sustain long periods of vacancy? As a general rule, think about buying investment properties that are close to amenities where people want to live - do your homework.
Rule #6 Understand your tax position when you purchase property
There are some things you can't avoid when you buy property, and tax is one of them. We recommend you get independent tax advice from an expert before you buy, and keep in mind:
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Capital Gains Tax - CGT is the taxable profit derived from the sale of a capital asset. The capital gain is the difference between the sale price and the basis of the property, after making appropriate adjustments for closing costs, fixing up expenses, capital improvements, allowable depreciation, etc.
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Depreciation of assets - When purchasing an investment property many of the expenses for the property are tax deductible. This can include fittings, stoves, white goods etc... Then again, there are some things you cannot claim. Once again, find an independent tax expert.
Rule #7 Know when to sell!
It's a great day once your property shifts from being negatively geared to positively geared. Put simply, this is when the income from the property overtakes the outgoings and you start to receive an income.
Where and what type