Four golden rules property investors should never break
Property investment can be difficult and so many people underestimate the effort that success requires. Avoid common pitfalls by following these four golden rules and your next property investment could be the first of many.
Adopt a more analytical approach and assess property based solely on its potential to turn a profit.
Take emotion out of the equation
When you buy a home to live in, emotions play a huge part in your purchase. You’ll buy because of the way the property makes you feel, and you may overpay for a home you really fall in love with. If you’re buying an investment, it’s essential that you take emotion out of the equation as much as possible.
Ask yourself the following questions instead of going with your gut:
- Will the rent cover enough of the mortgage repayments?
- Is the property the right type and in the right area to attract good tenants?
With the above questions in mind, you’ll be able to adopt a more analytical approach and assess property based solely on its potential to turn a profit.
Never overpay for a property
Overpaying instantly reduces an asset’s rental yield and decreases the chances of any capital gains.
Never pay more than a property’s worth. Overpaying instantly reduces an asset’s rental yield, decreases the chances of any capital gains, and increases the amount of your mortgage repayments. But how can you make sure you’re paying market price or below? By researching the market in the area.
First look at recent sales of similar homes in the immediate area surrounding your property. This will help you develop an estimated value for the property, and eventually a maximum amount that you’d be willing to pay.
Then consider the buyer interest in the area – are there several dozen people at each open home? Are properties selling in less than 30 days? If so, it may be difficult to purchase the property at a low price, and you may have to pay slightly more.
Go through ALL the numbers
Before you buy, consider all the financial implications of the purchase – down to the tiniest detail. First, ask for a rental appraisal from the real estate agent selling the property – this will give you an idea of the asset’s income potential.
Then work out the costs involved in holding the property. This should include:
- Minimum mortgage repayments
- Landlord’s insurance
- Estimated repairs and maintenance
- Property management fees
- Vacancies – plan for four weeks a year to be on the safe side
- Council rates
- Tax on rental income
To get an idea of what your mortgage expenses will be, speak to a mortgage broker and get pre-approval before making any offers.
Once you have calculated the total expenses you’re likely to incur each month, deduct that amount from your expected rental income. If the amount you get is positive – then so is your property’s cash flow. If it’s negative, you need to work out if you can afford to cover the costs that rental income does not. After all, your investment will never succeed if you can’t afford it in the first place.
Buy for the long term and go your own way
Property is not a get-rich-quick-scheme.
You can slowly build equity until you own several properties mortgage free. When it comes time to stop work, these properties could provide a decent passive income to sustain a comfortable retirement.
To make this work, you need to develop your own strategy, think independently and do your own research. To start learning the ins and outs of the property market, you’ll also need to seek advice from professionals such as:
- Mortgage brokers for home loan advice
- Financial advisors for help creating a strategy
- An accountant for help making sure your property is tax-efficient
- Real estate agents for tips on where and what to buy
With the right expert advice, a solid strategy and the willingness to put in the time and work required – your next property investment could be the first of many. Get in touch with an experienced real estate agent in your area to get started.