Buying an investment property can be a very lucrative business. There are numerous examples of people making significant gains and profits through a real estate portfolio. But it can also be a highly risky use of your money. And regardless of the size or type of property, your plan to invest in it will almost certainly require a substantial initial and ongoing spend. That’s why it’s important to take additional care when investing in property to ensure you minimise your risks as much as possible, protecting your hard-earned cash.
Here are a few things you should know and consider before investing your money in the real estate market.
1. The Price is Right
Any real estate investment aims to grow your capital through the right price. But it’s not always clear cut. A cheap property may have huge growth potential, but it may also be in an area where the market is simply cheap. Likewise, a high-end property may hold its value, but it also may not offer much growth.
2. Ensure You Have the Money to Support the Investment
Property investment can be very lucrative, but the gains are usually measured over the long-term. You don’t want to be forced to sell a valuable property early because you don’t have the capital to support it. Before making any investment, consider carefully both the short-term costs and the long-term running expenses to ensure your budget can handle it.
3. Seek Help You Can Rely On
Turning a profit from an investment property can at times be a full-time job. A property manager can help ease the burden, doing everything from managing the day-to-day issues to helping you select new tenants and reviewing rental costs. The best thing is they are usually paid as a percentage of rent collected, so if you’re not making any money they won’t cost you any money.
4. Study the Market
Real estate markets are often operating in a microcosm, with prices on one side of a street being slightly higher than the other, for instance. When looking to maximise returns, every little edge you can get matters so it’s important to study your rental market carefully before you buy. Research can be done online, but local knowledge is hard to beat.
5. Select the Right Mortgage
There are a variety of different mortgage and financing options available when it comes to buying properties. Finding the right model is not always as simple as selecting the cheapest one as the way the financing is structured can affect tax deductions. Consider all the options and your circumstances to find the best financing deal in the long-run for your investment.
6. Leverage Equity
If you already have existing properties then leveraging the value tied up in them can be a good way to fund further investments. If you have a $500,000 property with only $100,000 left on the mortgage, then you have $400,000 equity you can leverage. Leveraging an existing property also opens up the possibility to leverage against the investment property further down the line, and has potential tax benefits.
7. Negative Gearing
Negative gearing allows you to claim tax relief if the investment amount is larger than its income returns. This can allow you to make a technical loss on the investment property while making an overall profit by offsetting other taxable income. Negative gearing isn’t a good reason on its own to buy an investment property, but it can help with structuring your finances and budgets.
8. Limit Unexpected Surprises
Unexpected surprises can be catastrophic for an investment property. A sudden large spend on maintenance work can make a huge dent into your finances. Limit your risk of being surprised by having the property professionally inspected before making any commitments.
9. An Investment Is Not A Home
An investment property is a business, not a home. It’s important to keep this in mind when renovating and decorating. That said, putting in a small budget to renovate the home, such as simply putting in new shutters or redoing the flooring can mean you can ask for a higher rental price.
Everybody has unique tastes and styles, but an investment property has to be able to appeal to anybody. Simple and neutral tones are perfect as they are inoffensive and have wide appeal.
10. Long-term Thinking
Property investment is not a short-term cash generator. Investments can often take years or decades to show the type of large profits you may be after, and will often require further spending and time commitments along the way. Keep this in mind when making your financial and life plans.