Owning an investment property is a great way to generate some income and build wealth over time. However, buying just about any property is not the right way to build your investment portfolio. Unless you are really lucky and can turn anything you touch into gold, it’s important to have an investment strategy to maximise your returns. Here are some tips to help you get the most out of your property investment.
1.Buy it right
Buying it right is perhaps the most crucial step in your investment journey. Not every property will give you a good rental return or high capital growth. That’s why it’s essential to research the market and find a property most likely to meet your investment goals.
For those looking at flipping properties, it could be worth buying a rundown property in a popular suburb and turning it around to make a quick buck. However, if you aim to earn rental income, you might spend a great deal of money on making an old house tenant-worthy. It could be useful to run the numbers in such situations and see if it’s better to purchase a house that’s ready to move in.
Another important tip is to search areas with high capital growth. While the popular neighbourhoods might be out of your reach as a beginner investor, you can look at suburbs surrounding these hotspots as they are likely to grow in the near future.
2. Crunch the numbers
Owning an investment property is not a one-time expense. Besides your mortgage repayments, you have other costs to pay. These include:
- Council rates
- Insurance premiums
- Repair and maintenance costs
- The cost of finding tenants (marketing and advertising)
- Property manager fees
Add all such expenses and subtract them from your expected annual rental income to determine your rental yield and profit margin. At this point, you should also understand the concept of negative gearing.
When you take out a loan to purchase an investment property and find that your rental income is less than the interest you are paying and other expenses, your property is negatively geared. Fortunately, the ATO allows you to offset your losses against other assessable income through tax deductions.
Expenses such as the interest you pay on your investment loan, property management fees, and the cost of some repairs and upkeep can be deducted from your assessable income to save on tax. However, buying an investment property to benefit from negative gearing may not be wise, even though it can help you maintain your cash flow. It could help to speak with a mortgage broker to understand negative gearing and work out the returns from an investment property before committing to one.
You should also connect with a property surveyor to get a depreciation schedule to claim your depreciation costs.
3. Make it tenant-worthy
Even if you recently purchased a house, it doesn’t hurt to spend a little and make some practical additions to create a warm and inviting space for your future tenants. Here are some helpful ideas to create a good first impression:
- Spruce up the exteriors by painting fences and cleaning the driveway. Mow the lawn for a neat and clean look.
- Avoid painting the interiors in your favourite colours. Instead, use neutral shades for your walls and upholstery that most people like.
- If you are in the mood for renovating, consider upgrading kitchen devices and bathroom fixtures, as they tend to make the maximum impact on potential occupants of the house.
- With many people turning environmentally friendly, sustainability could be a top concern for your tenants. Be kind to the environment by ‘going green’ and make sure to highlight the efforts to your potential tenants. Simple ideas to ‘go green’ include investing in better insulation, installing solar panels, and switching to LED light bulbs.
Financing an investment property
An investor loan is a type of mortgage that can help you achieve your financial goals as a property investor. You’ll generally find investor loans to have a higher interest rate than owner-occupied loans, as investors are considered high-risk borrowers by lenders. However, these loans are designed to help you maximise your returns from an investment property and give you options like interest-only repayments to manage your cash flow as an investor.
If you are looking for an investment loan, it’s worth comparing deals from multiple lenders to get a competitive rate. You should also weigh the pros and cons of an interest-only loan. While you get to make smaller repayments during the interest-only period to maximise your cash flow and prioritise other payments, be warned that your repayment amount will jump significantly at the end of the interest-only period. Plan your expenses accordingly to make sure you don’t lag on your repayments at a later stage.
Another important point to consider is the serviceability wall that can prevent you from growing your investment property portfolio. As the number of properties in your portfolio grows, your debt to income ratio increases, and eventually, a lender will refuse to give you money for your next property purchase. This is known as hitting the serviceability wall. While this is something you cannot avoid, you can delay hitting this wall for a considerable number of properties if you plan your finances strategically. For instance, you might initially consider borrowing money from lenders with strict eligibility criteria and then move on to lenders with more relaxed standards. You can connect with a professional mortgage broker to understand your options or ask a Hashching expert for their opinion on investment loans.