Finding the right investment property
Choosing the location and property wisely are key to successful investing. Here are some time-tested fundamentals of finding the right investment property that could help you achieve your goals.
Make sure the property’s cost and likely rental returns align with your strategy
“Buy and hold” is a relatively straightforward investment strategy that is popular among many investors. Designed to generate long-term capital growth, this method often depends on your investment appreciating over time.
As the value of your property increases, you may be able to use the equity generated to borrow more money and increase your portfolio in the market.
The buy low, renovate and sell (or rent high) game is strong in the Australian market. This strategy relies on your skills as a savvy investor and experienced renovator to create equity in your property.
Although a more passive strategy, development can provide a lot of opportunities for investors looking to build equity quickly. Investors who follow this strategy normally provide funds to a developer who manages a property project from concept to building. Although this strategy is often quicker to deliver a return than “buy and hold” investments, it also carries significantly more risk.
Choose your strategy, know your cashflow
No matter which investment strategy you choose, it’s important to understand how your outgoings and income affect your overall bottom line.
Understanding rental yields
A high yield often means you’re managing your cash flow well and you’re experiencing a better return on your investment. However, rental yields can be affected by a number of factors including rental rate increases or decreases, property values and rate of supply in your area.
Your calculation will depend on what strategy you’ve employed and what your cashflow looks like.
Some basic calculations to apply to your property are gross and net rental yields.
Gross calculation: Annual rent ÷ The value of the property X 100 (eg $25,000 ÷ $550,000 X 100 = 4.5%)
Net calculation: (Annual rent - costs of owning your property) ÷ The value of the property X 100 (eg ($25,000 - $5,000) ÷ $550,000 X 100 = 3.63%)
Some expenses to apply to your net calculation may include: repairs and maintenance, depreciation, council rates and insurance. Other expenses, such as the interest you incur on your home loan, should not be included in your net calculation.
While your rental yield figure is a good measure of how your investment is tracking, it doesn’t provide a complete picture. Gross rental yield won’t take into account all your expenses, while your net rental yield will only track a small number of expenses, neglecting to take repayments and tax into consideration.
Rental yield calculations can provide a general idea of your estimated return, but they shouldn’t be the only thing directing your investment decision.
Consider the underlying value of the land
A good rule of thumb for property investment is that land usually appreciates, but buildings depreciate. The more land you have, the more the value of your rental property may increase.
A professional appraiser can help you understand the value of the land separate from the value of the dwelling. Appreciating land values can often be difficult to pin down.
In hiring an independent appraiser, you can be more certain in the value of the land you’re occupying and its potential projected growth over time.
If you don’t have the budget for an appraisal, you can look to compare other land sales in your area per acre. Look for a few recent land-only sales to calculate an average selling point.
By subtracting the value of your home from the average figure, you can produce a relatively good estimation of the value of the land you own.
Understanding investing costs and deductions
Balancing your expected property costs and potential tax adjustments can help you better manage your property outcomes in the long-term.
The sale price for your investment property is just one piece of your total costs. You’ll also have to cover the regular expenses that come with buying property in Australia including stamp duty, legal and conveyancing costs, transfer and search fees, and building and pest inspection reports.
Ongoing property costs
Along with the initial cost of your investment property, you’ll also need to consider ongoing costs that come along with it. Common ongoing costs include: repairs and maintenance, property management fees and home insurance.
You may also want to think about the costs you’ll incur if you chose to sell the property, such as agent fees and capital gains tax.
Negative and positive gearing
Most people who invest in property borrow funds to purchase their investments. This is called ‘gearing’.
Negative gearing is where you borrow money to invest and the income from the investment (e.g. rent) is less than what the investment costs you (e.g. the interest you pay and other related expenses). Essentially, this means that you’re making a loss on your investment and off-setting this against your taxable income.
Look for areas with a stable or growing population
Choosing to invest in a popular area could ensure that you’re never short of a tenant. While there’s no foolproof method to picking an area on the rise, there are a few tell-tale signs to watch for.
Understand what’s important to local renters
When looking for the right investment property to put your money behind, seek out features that are attractive to as many people as possible.
Know the facts about buying in Australia
Temporary residents – Foreign buyers who hold a temporary visa permitting them to remain in Australia for a continuous 12 months. Those who have applied for a permanent visa and hold a bridging visa allowing them to stay in the country are also considered part of this group.
Non-residents – Foreign non-residents do not ordinarily live in Australia. They can include those who hold a visa permitting them to remain in Australia for a limited time. Foreign governments, corporations and general partners of a limited partnership who meet the definition, and trustees of a trust that meet the definition are also considered to be non-residents.
All foreign buyers (temporary residents, non-residents, or short-term visa holders from any country) need to apply to the Foreign Investment Review Board (FIRB) to purchase real estate in Australia. All applications are subject to a certain criteria which the applicant needs to meet before a purchase can be made.
FIRB’s rules also require foreign buyers to channel investment into new developments. This is designed to boost the local economy and create supply in areas that need a housing boost.
Foreign buyers may also need to pay an application fee to be eligible to purchase property in Australia. If a property is valued under $1 million, the fee is $5,000. For properties valued over $1 million, the fee is $10,000, with an additional $10,000 for every extra million in property value.
To learn more about the rules and regulations for foreign investment in Australia, visit FIRB.gov.au.
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