Consider the following scenario: You have lived in your current home for over 5 years and the value of your property has appreciated nicely. The home loan is under control and over all your finances are in good shape. Time to buy an investment property? After all, you know lots of people that have done this and they seem to be going OK.
Now before you buy the nice house down the end of your street with a view to rent out you need to consider some strategy. The big question is “what are you looking to get out of this?”. If you are investing as a couple then it is vital that both parties have a clear understanding of what they want to achieve and have an agreed exit strategy.
Step One: Build a Budget
Yes, I know this not what you wanted to hear but you need to know your true household cash position. Be brutally realistic and see where your funds are going to and challenge them.
Step Two: Exit Strategy
If you plan to never sell then you may well be looking at different property types to someone with a short time frame in mind. If you are inspired by the home renovations shows and you are looking for a quick turnover then a rigorous budget and knowing all the costs is vital.
Step Three: What Can You Afford?
Can you afford to cover the cost of the investment loan for 3 months without causing hardship to yourself? Factor in vacancies, maintenance costs, council rates, agency fees, emergency repairs, insurance and strata corporate fees. Talk with a mortgage broker to find out your borrowing capacity and see if that works in with your own budget and lifestyle.
It is definitely worth talking with your accountant to understand the tax implications and if you have a financial planner as part of your finance team then run it past them as well to make sure this works in with your over financial planning strategy.
Step Four: Capital Gain vs Rental Return
The perfect residential investment will give a solid net rental return and strong capital growth. In reality it usually skews one way or the other. If funds are a bit tight you may look at a property with high rental return and modest capital growth prospects.
If you fund the property with a principal and interest loan you will find yourself slowly but surely building equity and even building up a cash buffer to cover an event like an extended rental vacancy. If you have a strong positive cash flow position then you may consider concentrating on capital growth and accept that the property may make a loss for even up to 7 years before it starts to “look after itself”.
Specialised properties will give the greatest rental return but many banks will reduce the amount of funds they lend on them or even not consider them as security. Issues such as long leases, small floor sizes, part commercial / part residential and location (close to the CBD or too far from the CBD) are all issues many lenders shy away from. These properties could still be considered for investment given you have assessed the risks and have adequate equity in your current home.
Properties that have solid capital growth have the scarcity factor and often follow high population growth but limited supply of housing being released.
Do the homework and really understand why you are looking to take on an investment property. It is a large and costly investment, so make sure all parties have a clear goal in mind.