Buying property can be one of the best ways to invest your money and build wealth. Yet new investors often feel overwhelmed at the thought of taking the plunge into property. We asked the experts on their top 5 tips:
1. Create a long-term portfolio plan
One investment property isn’t going to support a self funded retirement, so if you fail to plan, your plan will fail. When creating your portfolio plan, think about the end game – it’s imperative to set a passive retirement income target that you want your properties to deliver for you. Working back from this target will certainly help you identify the right property investment strategies to adopt now and over the journey, such as growth or yield, or a combination of the two, plus locations, price points and the number of properties you will need to buy to reach your self funding retirement target.
Within this initial planning stage it’s wise to consider being a borderless investor, because the Australian property market is made up of hundreds and hundreds of location submarkets, all in different stages of their investment cycles. So if you want to get best returns on your money, you might have to look interstate. Furthermore, within those locations, different classes of property deliver different returns, so it’s a good idea to diversify your portfolio to include properties with different profiles (house, apartment, townhouse, villas etc) to achieve the right balance of capital gains and rental yields over time.
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2. Know what you can afford – today & tomorrow
When building a real estate portfolio, it’s important to understand your surplus cash flow position both now and in the future. Your current surplus may change as your life changes with different events, so you want to be able to know that you can afford to hold onto it today and also for many tomorrows.
Big events like getting married and honeymoons have lump sum cash flow impacts and events like starting a family have both lump sum and ongoing impacts such as going to one wage for a period of time and potentially moving to part time incomes for a while, coupled with childcare and future schools fees. Property is a long term investment, so if you think you are going to make money quickly out of property you are more than likely going to be wrong.
By starting with the end goal in mind, you can create an investing plan that considers your fluctuating earnings and household expenditure as you move through different stages of your life. Importantly you should consider these cash flow fluctuations and this will help you chose the right investment strategy for you at that time. Just as important, these cash flow changes shouldn’t automatically put you off investing altogether.
3. Get your loan structure and loan strategy right
Today’s loans come in a variety of guises, offering different interest rates, features and repayment flexibility, including:
- Honeymoon, fixed, variable and split-interest-rate loans.
- Interest-only and principal and interest (P&I) payments.
- Offsets, lines of credit, redraw facilities and more.
- Pricing discounts and LVR rate pricing.
As an investor, it’s important to understand how the different types of loans fit with your investment objectives. For example, interest-only loans can offer borrowers more control of their money, plus some tax benefits and variable-rate loans often have greater repayment flexibility and features. The lender and the type of loan product you choose can have a big impact on your future lending plans and on your wealth building ambitions. Getting your loan structure right for investing is key.
4. Understand how property negotiations work
Smart investors know how to get the right property at the right price. A good starting point is to do your property research and look at numerous properties to get a sense of the market and comparative property values. When you’re ready to make an offer, contact your agent and explain what you believe the property is worth, factoring in any potential items such as repairs and renovations.
If you’re unsure of a property’s value, getting an independent evaluation can help bolster your bargaining position. Two important tips here are to never buy a property without a building and pest inspection and never sign a contract under pressure.
If there is competing interest for the property and the value moves past its ‘fair value’ based on your research or the independent valuation, then don’t get caught in paying too much for it. Walk away as you will find more properties presenting themselves for further consideration.
5. Be clear about the person you’re getting advice from
Many first-time investors find it helpful to seek professional property investment advice. While it pays to get expert advice, it’s important to get the right advice. When choosing a property investment advisor be sure to ask:
- How are they getting paid?
- Are they independent? If not, who do they represent?
- Do they pick and recommend from a set stock list or do they search the full marketplace?
- What are their qualifications to be giving you property investment advice?
Don’t be afraid to ask the hard questions up front, and be sure to ask for references or testimonials from previous clients.
Buying investment property is an exciting step towards building a strong financial foundation. Since everyone has different needs and objectives, and often the agenda of some advisors is self serving, be sure to consult with a Qualified Property Investment Advisor (QPIA) who can give you expert advice on your unique situation. Thank you to our expert advisor Ben Kingsley on Wealth Management.
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