So you want to start investing in property?
Here are 5 things you need to do to give yourself the best chance to succeed as a property investor.
1. Secure Your Income
For property investors – cashflow is king.
When starting out as a property investor you will be relying on the income from your ”normal” job to help fund your first purchases.
You will also be using a lot of borrowed money to help fund the purchases, hence you need to ensure you have a contingency plan in place for you and your family.
Eventually your property investments will provide the rental income for you to live off, but before that happens you need to make sure your income is secured and unexpected events don’t derail your investing plans.
I am talking here about life insurance.
To cover the risk of adverse events affecting our ability to earn an income there are the following life insurance covers:
- Life (Death) insurance (to provide for your family in the event of unexpected death)
- TPD insurance (to provide a lump sum payment in the event you become totally and permanently disabled and cannot return to work in any capacity)
- Trauma insurance (to provide a lump sum in the event you suffer a certain sickness or injury)
- Income protection insurance (to provide an ongoing income in the event you cannot work for a period due to illness or injury)
Life insurance provides some cover in the event that your financial plans are derailed due to sickness or injury.
Treat your life insurances as a cost of doing business for your property investing empire.
2. Research, Research, Research
Good investments come to those who do their research.
Despite what you may read in the news, not every property is a good investment.
Consider that there are around 9.7 million dwellings in Australia worth around $6.8 trillion, plus another $1 trillion worth of commercial property (figures as at 31 December 2016).
CHART: The Size of the Property Market in Australia
Based on the above figures around 5% of the total properties come on the market for sale each year (465,469 in the chart).
Find the Best Property Investments
Of these available properties perhaps another 5% are considered good investments, which would equate to 23,273 good property investments in Australia per year.
How Many Others Are Looking as Well?
Over 1.7 million people in Australia own investment properties, hence at any point in time you will be competing with them to buy some 23,000 good properties.
I hope that gives you some idea of the magnitude of the market and the amount of research you will need to do to find the best property investments.
Some of the property blogs I like:
Some people think that if a bank is willing to lend them money, then the property must be a good investment. The bank isn’t worried whether the property is a good investment or not, they are more interested in whether you will repay the loan.
After all the bank doesn’t share in the upside of the property value, they make their money from the interest you pay each month on the outstanding loan.
3. Build a Spreadsheet
To be a successful property investor you need to know all the incomings and ongoings that make up your investment.
The chart below demonstrates:
- Income is from rent,
- One of the biggest costs is interest on borrowings,
- Other rental deductions have been steadily increasing,
- Most investors are making a cashflow loss on their investment properties.
CHART: ATO Figures on Rental Properties
To get an idea of the range of expenses involved in holding an investment property, click the box below (if you dare):
- Interest on borrowings
- Accounting fees
- Advertising rentals
- Bank charges
- Council rates
- Government charges
- Land tax
- Property management
- Repairs & Maintenance
- Water Rates
Depreciation: It is also possible to deduct the cost of the wear and tear on the property and its fixtures and fittings. Depreciation is calculated according to a defined formula. Depreciation is a non-cash item, meaning you don’t physically have to pay the expense each year, but you can be sure at some stage you will have to renovate and repair the property and this will cost money.
You will need to build a spreadsheet outlining all these costs and the likely tax impact of your investment property.
Case Study: Negative vs Positive Gearing
4. Consider a Commission Free Mortgage Broker
Before taking the leap into property investing you want to ensure you have built a good team of experts around you.
One crucial element of your property investment strategy will be financing your investments, hence you will need a good mortgage broker on your team.
The problem with many advisers in the mortgage broking industry is that you can’t be sure who they are working for.
Is the mortgage broker working for:
- You, because you are getting the loan; or
- The bank, because the bank is paying them a commission?
CHART: Mortgage Broker Commissions
Solution: Pay a Fee for Service, Get the Commission Back
Consider removing all the issues by finding a fee for service mortgage broker, who will refund all the commission back to you.
If you pay a fee for service, you can be sure the mortgage broker is working in your best interests and they are motivated to find you the very best deal.
The added benefit is that you will get all the commission refunded back to you, which will certainly help your property investing cashflow.
5. Get a Proactive Accountant
As we saw from the chart in point 3, deductions make up a large part of the property investing business.
You will need to find a good accountant who can help you keep on top of all the deductions and ensure your taxation outcome is optimised. They will also help you develop a depreciation schedule, which is crucial to ensuring your deductions are maximised.
A good accountant will also recommend that you use an accounting package like xero, which will make your job of recording keeping much easier and more importantly in real time.
- Start investing in property with a business mindset;
- Look to manage the risks and be prepared to do the research required to be successful;
- Build a good team around you including a commission free mortgage broker and a good accountant.
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.