The story is quite common amongst first time investors…I come across it frequently. You know you need to do something to secure your financial future. But the myriad of conflicting reports from ‘experts’ make things a little overwhelming and the whole process starts seeming a little too hard. This is something that often stops people from ever entering the investment market. Well, the truth is it’s really not that hard at all!

In this article we will explore a few simple tips and rules that investors should follow to ensure they are heading down the right track.

1) Let’s start with what I call the “Golden Rule” of property investment. This is something that you should always follow no matter what. It sounds really simple but so many investors forget to follow this rule and get themselves into real trouble, causing themselves a lot of unnecessary stress.

Always start with YOU. What are your personal goals and what are you trying to achieve? What is your personal set of circumstances, both financial and material? What is your risk appetite or comfort level and (for couples) are you both on the same page? As mentioned earlier, this sounds really simple but to be comfortable in your decision you need to understand what you are trying to achieve. Do not worry about what anyone else is doing, as it’s more than likely their personal profile is different to yours. Equity, savings, appetite for risk, priorities, phase in life or even overall goals will be different between investors. Remember it’s your journey, your risk and your reward, so always start with YOU.

2) Investing is like driving a car. Once you have worked out where you want to go, you will need to work out how you are going to get there. It’s important to ask the smart questions regarding your immediate finances. What can you really afford to borrow and repay? How will you fund the deposit? Will it be from savings, equity in another property, or perhaps a combination of both? To get an accurate assessment take the time to see a broker, and not your bank. The big difference is that your bank will only have a limited product range and usually try to ‘cross-collateralise’ (cross-securitise) your loans. Tying your properties together is something that suits the banks as it hands them more control over your assets. However, it is best for you that each investment is separate as it will allow you to grow or sell down your assets as life evolves.

Using a broker will also give you access to multiple lenders and a wider choice of products, allowing you to get the best product for your circumstance. It may be the case that your home is with one lender and your investment is with another. A good broker should be able to look at your situation and source the products that are right for you. This is a decision that should be carefully considered as the correct advice and structure at the start will make your investment journey much easier in years to come.

3) By now you know what you want to achieve and what you can afford. So what should you buy? This is the all-important question that will get investors and spruikers foaming at the mouth. Ask them and they all think they are right! “My property is best because it has more bedrooms, or is on a higher floor, or it is in a better street, or it is a more prestigious suburb, or it has more land…” Sure, all of these things are factors in the value of the property, but not a reflection on how an investment will perform over time. The real truth of the matter is if you went to your local estate agent, picked any property in the window, bought it for full list price, kept it for 10 years, then 99 times out of 100 you would make money. That is the beauty and safety of Australian property over the long term. But then again, simply making money doesn’t make it a good investment, nor ensure the returns and resulting opportunities were optimised. When buying there are a number of factors to consider that will help maximise your investment opportunity and return.

All areas attract different capital growth rates, so the growth you get from your investment will simply be a multiple of your capital investment, the percentage capital growth rate, and the number of years you hold the property.

For example: if you purchased a $400,000 property in an area that attracts an average capital growth rate of 7.2% p.a. (look for 10 year averages, not quarterly, as short term anomalies can seriously affect the outcome) and held it for 10 years, the property will be worth around $800,000. This gives you an equity gain of $400,000 or around $40,000 p.a. This simple formula is a way for you to get a good idea of how the property will perform for you over time.

Now we have touched on growth, what is it place going to cost you? This is where we go back to you and your personal investment plan. How much can you afford to invest each week? All properties are not created equal. So just because the purchase price is $400,000, the weekly contribution you need to make can vary substantially. A number of factors will need to be considered when working out the weekly contribution.

  1. Firstly, what’s going out? How much did you borrow and what interest rate are you paying?? How much stamp duty did you pay? In some instances investors can have massive stamp duty savings by buying off the plan (VIC only). From there, how much will you need to contribute each year for maintenance? Are there Owners Corporation fees? What are the council rates, water rates and management fees involved
  2. Secondly, what’s coming in to service the debt? As mentioned before, different areas attract different capital growth rates as well as different rental returns. Many people assume that a $400,000 property should attract $400 p.w. rental income. This is not the case at all. The rental return can vary greatly depending on the factors of supply and demand (eg: suitability of the property to the marketplace, vacancy rates, age, state of repair and proximity to transport and amenity)
  3. Once you have established your rent you need to work out what tax deductibility is available from the property to contribute to the outgoings. New properties offer the best deductions as you can depreciate the building at 2.5% of the construction value over 40 years and the chattels at 20% over 5 years. To ensure you get the maximum deduction possible you should get a quantity surveyor to prepare a depreciation schedule.

You only need to have one report prepared and it will last you for the life of the property. The only reason you should need to get another report prepared is if you undertake renovations and install new depreciable items in the property. A depreciation schedule is an absolute must for anyone with an investment property. The initial cost of the report is tax deductable and will maximise your returns year after year. Buy Property Direct include a BMT Tax Depreciation schedule at settlement with every purchase.

Try to get a good handle on the incomings and outgoings of your potential investment property BEFORE you make your final decision. It can make a huge difference in both your weekly cash flow, the serviceability of your investment, and your ability to duplicate your investment portfolio in the future.

Once you have evaluated the investment and decided to purchase you will need to get some legal advice. Selecting the right conveyancer or solicitor will ensure your interests are protected throughout the process.

4) Management and maintenance of your investment is the next important step, because the long term results are directly related to how that property has been ‘worked’. Property management is something to be covered in detail in later newsletters, but needless to say both concepts are about maintaining the integrity and longevity of your investment for years to come.

5) Finally, I will round out this article with what I call “Golden Rule” #2. This is something I would like you to remember throughout the whole process. No matter what. Whether it is throughout the purchasing or settlement process, dealing with banks, brokers, agents, tenants, maintenance, Owners Corporations or neighbours, remember one thing. This is a business – your business! This is your money and this is your Do not get emotional about it as these thoughts cloud the investor’s ability to make educated and logical decisions in the best interest of achieving their goals. Here are some simple examples of making business decisions:

Example 1: If you like the teller at the bank you have been going to for 10 years, before you give them the business ask yourself this. ‘Are they the best person to be working for me? Do they have the best product to support my business?’. These are non-emotional questions that should be answered with a pure business mindset

Example 2: Upon approaching the conclusion of your first tenant agreement, you’re advised by your property manager that you may be able to extract another $10p.w. by relisting to the market. This sounds attractive, right? Before you make the decision to grab a few more bucks evaluate the real cost to you i.e. what will the vacancy period be between tenants moving out/in? What will the letting and advertising fees be associated with securing another tenant? Are you comfortable with the current tenant’s upkeep of the property? Quite often the small gain is negated by the true costs.

So evaluate everything, calculate cost vs return and make smart business decisions about everything to do with your portfolio, without emotion.