What to look for when buying an investment property?

If you are wondering what to look for when buying an investment property, here’s 5 tips to help you get started when looking to invest in property.

Many of the most successful investors use real estate to build wealth.

If you’re ready to jump into property investment as an asset class, there’s some things you’ll want to know because where and what you buy can affect your return on investment.

Let start with what to look for when buying an investment property

1. Where to buy

• Look for areas with high growth, that is, where there is potential for capital gains.
• Look for areas where rental income is high compared with the property value.
• Research median prices to show what you might pay for property in the same area.
• Investigate vacancy rates. A high turnover may make it harder to rent the property or make it difficult to sell later.
• Research proposed changes in the suburb that may affect future prices. Things like planned developments or zoning changes can affect the future value of a property.

2. What to buy

Look for properties with features that have wide appeal, such as a second bathroom, lock-up garage or somewhere close to shops, schools and transport.

• Choose a property that will attract more than one segment of the rental market, such as singles, couples, young families or retirees.
• Low maintenance costs are important: Units can be perceived to be easier to maintain than houses, although you will have to pay owner’s corporation fees, which can decrease your returns.
• Property prices can fluctuate: When deciding if a property investment is right for you, remember that property prices can go up and down.

3. Understand borrowing costs

Buying, selling and managing an investment property can affect your overall return. When you buy a property, you will have to budget for expenses. For example, if you borrow to invest you will have interest repayments and if your investment is positively geared you may pay tax on your rental income. If you sell the property you may also have to pay capital gains tax if the property has increased in value.

Key things to decide in what to look for when buying an investment property:

Most people borrow to invest in property. But the more you borrow, the more you pay in interest. Therefore, it is important to understand negative versus positive gearing:

Negative gearing

Negative gearing is when your income from an investment is less than your expenses.

A loss can be used to reduce your taxable income which will reduce the amount of tax you pay. You’ll need to know what you can claim as a deduction, and remember you are only reducing your tax payable because income from your investment isn’t covering expenses.

Positive gearing

Positive gearing is where your income from an investment is higher than your interest and/or other expenses. This means you will have extra money left over but you may have to pay tax on the additional net income.

Other things to consider in what to look for when buying an investment property

4. What expenses to budget for

There are numerous costs involved in real estate and this is the reason why you should start with a plan and finish with a list of what you’ll need to budget upfront. Consider using the “35% rule”, which suggests that, on average over time, expenses on a property will equal 35 per cent of total income. So if a property rents for $2,000 a month, put aside say $700 to cover expenses a month before paying the mortgage payment.

5. Managing an investment property

You have two options when it comes to managing your property: DIY or engage a managing agent.

• If you manage the property, you avoid paying management costs. But you’ll have to do everything, from showing the property to tenants to collecting rent and organising repairs. You also need to comply with landlord regulations.
• If you get a managing agent to look after the property, their management fees are generally tax-deductible.

Terri Scheer, the landlord insurance company publishes a guide on what to look for in an investment property too.

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

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