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Should I buy the house or property next door?

If you are wondering ‘should I buy the house or property next door?’ then it is really important to consider whether, where and what, you buy will affect your return on investment.

The real estate mantra ‘location, location, location’ is no less vital when choosing an investment property.

So should you buy the house next door?

It depends. Investing in real estate — or any investment — should be about increasing your wealth and securing your financial future. Therefore a simple rule before considering any property purchase is to understand the market where you are buying.

If you decide to invest in a house in your neighbourhood, you’ll need to do some leg work.

For example, accessing independent information from a source such as RP Data can provide crucial insights. This will include data on average rents, property values and demographics. You also need to investigate whether council or government are planning works which may impact negatively on the area you’re interested in.

Putting all your eggs in the one basket may not be the wisest financial idea either. Different property markets, for example different States are often at different stages in a market cycle. For example, one State might be booming and another might be going into a downturn. By having property investments in different markets, you can go a long way towards hedging your bets, which can be of benefit in the long run.

Of course, an advantage of buying the house next door is that you can choose your neighbours. But a disadvantage is if the value of one house takes a hit, it is unlikely the other one will rise.

It all comes down to making considered decisions, because positive returns can be delivered if the fundamentals align. Here’s 4 things to reflect on, which may help to mitigate risk:

1. Buying at the right time is critical

Investing in real estate is all about capital growth, so choosing a property that is more likely to increase in value is one of the most important decisions you can make.

2. Count the cost of investing if you are considering buying the house or property next door

Before making the leap you also need to be aware of taxes involved in property investing and add these into your calculations. Stamp duty, capital gains tax and land tax need to be taken into account. While interest rates will vary over time, property investors can expect to increase rents when rates are on the rise and hold steady when they fall.

3. How you manage your investment when you buy the house next door

How you manage your investment can also determine whether you will reach your financial goals. It pays to consult professionals you can trust. With the right advice, you can decide if it is the right path for you.

If the fundamentals check out, also consider a property manager to find the right tenant. It is money well spent [and generally tax-deductible] in the quest to get the best possible value from your property.

4. Investment time-frame

While there’s no doubt investing in property can put you on the path to long-term wealth. Property should be seen as a medium to long-term investment to maximise returns. That’s because if you sell it within 12 months you’ll be slugged with a hefty capital gains bill. If you sell well after that then a 50 per cent CGT discount applies if the investment property was originally purchased with the intention to hold it. Just be cautious if you are considering buying the house next door.

Also, it worth noting that it typically costs 5% of the purchase price to get into a property in taxes (i.e. government stamp duty) and fees (i.e. bank fees and Solicitors costs). And up to 4% (i.e. real estate agent fees and advertising costs) to get out. So for every $100,000 you spend on a property, you need to make back an additional $9k before you break-even on any sale.

Domain.com.au have lots of handy tools to allow you to research more about the house next door and other information about your suburb.

If you’d like to chat about finance, please contact us.

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