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The investment property guide

A woman ponders her financial future, contemplating the path ahead with hope

Questions to ask yourself before placing an offer

With the property market in a growth phase, rental vacancies at all-time lows and staycations replacing overseas travel, many people are considering this as an opportune time to enter the investment property market. Whilst it’s a decision that needs to be based on many different factors, we’ve come up with a list of questions to ask yourself before you sign on the dotted line.

Are you buying with your heart or your head?

An investment property is just that, an investment, so it makes sense to make a decision based on maths. You shouldn’t get the same feeling from buying an investment property that you did when you bought your house. If you’re feeling a little lacklustre about your investment property purchase, it could be because you are making a decision based on return on investment, which is a good thing!

If you plan on living in your investment property in the short term and renting it out in the future or keeping it for your retirement home, your decision should still make sound financial sense. Your investment property should be a good compromise between your needs, any tax benefits, and return potential.

As a general rule, when looking at properties, it’s important to ask yourself if you are drawn to features that appeal to your taste, or if you like it because of its potential for rental return, capital gain or because it’s in an area with growth potential. It’s wise to set yourself a limit at which point an investment is no longer profitable, such as a rate of return, to avoid being swayed by those upmarket new kitchen appliances or backyard that would suit your family.

What are your revenue stream options?

With many different ways to make money on investment property, it’s wise to consider all options and continually reevaluate these as market conditions change. Some investment properties might be best suited to being rented out to long-term tenants. Others may have the potential to be renovated and sold or it may make sense if your property is in a desirable area, to offer it as an Airbnb.

Taking advantage of the current surge in demand for staycations could offer a much higher rate of return than a long-term tenant, albeit with less stability of income with travel restrictions in a constant state of flux. If you’re considering this option, be sure to do your research on what accommodation is on offer in the area, vacancy rates and the monetary and time costs of cleaning and managing the property. Also, pay attention to your local council’s holiday letting policies that regulate short-term accommodation. For example, the Byron Shire Council regulates a maximum number of days per year for holiday lettings as well as requiring a development application (DA) in order to let your home.

Will you manage it yourself or employ the services of a property manager?

There are pros and cons to each approach, so what works best for you may not necessarily suit someone else. Property management fees are typically 7–10% of rental income and will save you the hassle of dealing with tenants yourself (you’ll be spared from hearing about that water leak that keeps springing up) and managing repair works. Be aware that property management service levels can be variable given the low commission they receive (think $50 per week on a $500 rental). Therefore it’s worth doing your research to make sure your chosen property manager has a good track record of keeping on top of issues as they arise, conducting regular inspections and communicating well with both landlords and tenants. If you have time on your hands, live close by or have handyman skills, you may wish to save money and manage and maintain the property yourself.

Managing an Airbnb can be a time-consuming task of managing bookings and key drop-offs, answering questions and organising cleaners. Thankfully you can enlist the help of one of many companies that have sprung out of the Airbnb economy to manage your listing, taking out the day-to-day legwork for investors.

Is it in the right area?

The old adage is true—location, location, location! Make a well-informed decision by becoming an expert on the area or areas you are looking to invest in. Get to know several different local agents and find out their opinions on the potential of the area as an investment opportunity, now and into the future.

A good indicator of up-and-coming areas is what infrastructure currently exists and what is planned. New schools, hospitals, retail or sporting facilities planned for an area are a sign growth is predicted in the region. Look up approved development applications to keep abreast of any new rental options that have the potential to flood the market and compete with yours.  Other factors to consider are crime rates, access to public transport and the job market to assess future rental demand.

As a result of COVID-19, thousands of people have looked to relocate. Regional areas may represent good growth potential and the best value opportunities. Having been at the heart of a regional community for over 50 years, SCCU has seen the growth of the Northern Rivers firsthand and can attest to the benefit of investing in the right regional areas. As the cities become less affordable, many Aussies have made the move to regional areas seeking better value and more balanced lifestyles. Take a look at our article on how the Hemsworth Effect has transformed the laidback northern NSW town into a property hot spot.

Will you renovate or rent as is?

Finding a bargain can be tempting, but how much will you need to factor in to get the property into a condition that will attract a good rental income or a profit if you intend to flip it? It’s important to always get a building inspection to identify any underlying issues and get quotes from contractors for the renovations you intend to do prior to purchase to minimise the risk of surprise costs once you’ve purchased the property (think structural issues, asbestos removal or re-roofing). If you’re considering a renovation project, check out our article before diving into a renovation for some sound renovation advice.

What are my financing choices?

Whether you’re looking to purchase an investment property or refinance one, knowing what’s important to you in an investment loan is a great place to start. Do you want a lender who is knowledgeable and takes care of your needs? Do you want the certainty of a fixed-rate loan or is a variable interest rate more suited to your circumstances? What extras such as redraw or offset accounts are important to you and will their benefits outweigh the costs to you? For example, an offset account might reduce your monthly interest payments but because interest rates are relatively low, you may not be borrowing enough for the savings to outweigh the monthly fee of having an offset account attached to your loan. SCCU has a range of flexible investment loans to suit your needs and our lenders know exactly how to find you the very best option through personalised service.

Negative gearing your investment is a term often heard when discussing investment properties. Simply put, when the rent paid is less than the ongoing expenses of the property and you’ve borrowed money to invest, you are essentially running at a loss which can be used as a tax break. The cost of interest payments and maintaining the property are classed as expenses however, the capital repayment proportion of your loan repayments won’t count towards this. This may reduce your taxable income, leading to savings on your income tax, but any increase in the value of the property may also have a financial impact. The opportunity for negative gearing may mean it’s a wise decision to get an interest-only loan to maximise the tax effectiveness of your investment. As always, have a chat with your tax accountant to see if negative gearing is a sound strategy before basing a purchase decision on this.

How long am I in it for?

At some point, you are going to want to cash in on your investment property and the length of time you intend to keep it can determine which property is best for you. Investment properties are a long-term investment option, however, your criteria for the right property might change if you decide you want to keep it for ten years or twenty.

If the area you are investing in is an up-and-coming area, you may want to adopt a longer-term investment strategy to take advantage of capital growth. Inner-city investments that attract an already high rental return and lower vacancy rates might consequently be held for shorter periods of time.

In the long term, as you reap the rewards of your investment property, you’ll thank yourself for taking a considered approach to your decision.

Related SCCU Products

Disclaimer: The ideas, discussions, options and details expressed in SCCU Blogs are for general informational purposes only and are not intended to provide specific personal advice or recommendations for any individual or on any specific security or investment product. We intended only to provide education about the financial and banking industry to make the complex simple, and help everyday customers realise their dreams.

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