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Investing in the property market can provide a path to financial security and wealth, but it can also be fraught with risks and information overload, even for existing homeowners. In this guide, we outline the questions to ask before jumping in, as well as the rules savvy investors follow for success.
Unlike your primary place of residence, an investment can provide you with a steady rental income over time in addition to the rewards that come with capital growth. But let's not forget that there are a many different ways to invest in the property market. Direct investment (buying a property yourself) is just one option. The alternatives may include real estate investment trusts (REITs), investing in home construction and using equity from your self-managed super fund.
In this guide, we are going to focus on buying investment real estate, the questions you should ask and the data you should look for. Let's start with the questions.
Should I invest?
Making a profit from property is not guaranteed and investing isn’t right for every one. It's important to understand the pros and cons of property investing, from purchase, maintenance and management costs, to tax implications, capital growth predictions, and so on. And to make sure you’re in a suitable financial position to manage the risks.
How do I create a strategy?
When the Australian property market is running hot, as it did during the pandemic, it's easy to feel like you should jump in and buy something—anything! But before you leap, it's important to do plenty of research. Investigate different suburbs, apartments versus houses, new construction versus existing and commercial versus residential real estate. Talk with property experts, including real estate and rental agents, and get advice from your accountant about any tax implications. This is how you build a strategy around your specific budget, situation and financial goals.
How do I find the right property?
Pounding the pavement is one way to hunt for an investment property. The benefit of going to open inspections is that you can see properties with your own eyes and develop a relationship with real estate agents. Still, don't rely on real estate agents to provide all the data you need. At My Finance Agent, we give you free access to professional property and suburb reports.
But there are also other ways to look for properties. A buyers agent, for example, will do the legwork for you and some offer their services for free. These agents often represent new constructions (buying off the plan), but some may also have properties on their books that are ready to buy immediately.
How do I choose the right loan?
The right home loan can make or break the profitability of your investment, so it's important to shop around for the best investment property loan. Doing the legwork yourself would be time-intensive, whereas we make it our mission to find you the best rate with the right loan features and to secure a loan pre-approval before you go property shopping.
How will I manage my investment?
It’s important to remember that an investment property is a long-term commitment and you need to know how you are going to manage it over the life of your loan.
Being financially prepared for when the tables turn can help to minimise some of the potential risks in an ever-changing market.
It’s easy to fall into the trap of poor cash flow management as a beginning property investor. This is why understanding all of the costs involved in buying and holding property is extremely important. A good mortgage broker will help you navigate these costs and refer you to other professionals (eg. accountants, conveyancers, financial planners, rental property agents, insurance brokers) who can provide you with balanced, independent advice before you invest.
What should I budget for contingencies?
Murphy's Law says that if something can go wrong, it eventually will go wrong. As well as managing for factors you can control, it pays to plan for the unexpected. Could you, for example, afford to cover the cost of major repairs, an increase in strata fees or sinking fund levies, or a long vacancy period?
"Did you know: As an asset class, the Australian real estate market is worth over $6.5 trillion? That’s three times more than all of the superannuation funds across the country combined, and more than four times the value of all Australian listed stocks" (Source: CoreLogic, 2016)
Capital growth + rental return
Once you've determined a budget, you can narrow your search to particular suburbs and types of properties that meet your investment objectives. These are generally properties that will have the greatest potential for capital growth and rental return.
In terms of specific criteria to identify — and bearing in mind the type of tenant you're looking to attract — the ideal suburb for property investment returns generally has:
Properties that are in high demand from tenants
Good access to public transport
A wide range of public amenities, including shops, schools and leisure facilities
Access to employment opportunities or within close proximity to business/commercial hubs
Some key indicators to watch
Property values: Monitoring the market is a key part of any successful property investment strategy. One important performance metric to track is the trend of property values. Are they rising, flat or falling? We can provide suburb sales data to help you identify which postcodes are posting higher growth rates than others.
Days on market: If properties are selling quickly, then a short days on market (DOM) metric is a good sign that a market is buoyant. You will, however, need to examine this trend over time, as this figure can vary on specific location, type of dwelling, macro-economic factors, and so on.
Rental yields: Rental yield is rental income represented as a proportion of a property's value. Rising rental yields are a good sign that there is strong demand for rental accommodation in the area.
Auction clearance rates: Auction clearance rates are the percentage of the total number of properties successfully sold at auction over a week or month. Generally speaking, rates over 70% is likely to indicate a seller's market (meaning hot competition among buyers), though this may depend on the local area. It's important, therefore, to look at auction clearance rates over time.
Vacancy rates: Vacancy rates tell you how long a property has been empty while looking for a tenant. Falling or low rates indicate high demand for rental properties.
Capital growth potential: It can be difficult to predict, but a property's capital growth potential will affect the rate at which potential equity will develop in the property. For example, factors that may devalue or slow capital growth include waves of new construction or land releases. Factors that may increase capital growth may include infrastructure projects or a change in development rules that limits new construction.
Equity is the difference between the current value of the property and how much you owe on it. The build up of equity in your investment property is desirable because you can leverage it to buy further properties, free up cash for other purposes or realise a profit when it comes time to sell.
Markets on the 'up'
Some suburbs or developments are ready to boom, but there are no trends to observe yet. This is why seasoned property investors often look for areas with:
A rapidly growing population, which is going to drive demand for properties
A vibrant and diverse local economy with a range of employment opportunities
Investment going into local infrastructure, including new transport links, amenities and local services
Median household income that is higher than inflation
Low housing supply/high demand from buyers
Talking with buyers agents or property investment services can be an excellent way to gain these sorts of insights.
Invest in real estate with confidence
Get in touch with us and talk with an investment loan expert for free. With the right advice and loan, property investment can be one of the most satisfying and profitable decisions you make. We're here to help you understand the goals and strategies behind successful property investment, including the right loan structure, planning your investment strategy and finding the right property.
*Information for this article has been sourced from OpenAgent and Property Update.