If you’re at that point where your mortgage is under control and you’ve got some savings in your bank, there’s a fair chance you might be considering an investment property.
We often hear stories about Australia’s boom suburbs, but before you jump into looking for an ‘investment hotspot’ you need to consider a few things:
- What do you want your investment property to do?
- How does your cash flow look?
- How long do you want to keep it?
1. What does your investment need to achieve?
- Are you looking for long term capital growth or a steady rental income stream?
- Do you want a property that needs some improvements?
- Do you intend to sell it after you have renovated or redeveloped?
- Do you want to purchase a property, put some tenants in and eventually move into it as your home?
- Are you simply seeking a property that can provide a nest egg for your retirement?
2. Have you thought about your cash flow?
When looking for cash flow (i.e. rental income), what should you consider?
- The capital cities are where rental growth is often higher than smaller cities/regional areas.
- The inner-city areas can provide higher rental returns than outer suburban areas, but the cost of investing will also be higher.
If you’re looking for potential tax breaks then you’ll be purchasing a place that is negatively geared. That means your investment will need some financial input from your hip pocket on a regular basis. It also means higher risk and being able to cope with a negative cash flow from your investment.
3. How long do you want to keep your investment property?
Real estate investment is not for the short term unless you’re a speculator. Be prepared to hold your investment for the medium to long term if you want to achieve both rental and capital growth.
If your idea is to get a quick return, maybe you should consider another type of investment.
4. Where is the better capital growth?
Traditionally, it’s the larger capital cities that consistently show better capital growth, but it’s also possible that these areas will see larger percentage drops in value. You can lessen your risk by accepting a more conservative capital growth outlook in less popular areas.
If you’re happy to keep your property for a much longer term and allow it to grow into money, you’ll find that suburban centres and regional areas will have lower values and possibly longer-term tenants.
5. What are hotspots?
These are areas where, historically, the value has increased quicker or better than in other areas. (Note: the important word here is “historical” – meaning that all evidence of growth has been in the past.) There are no easy ways of predicting what will happen in the future without a crystal ball.
Some other factors where the experts see potential are:
- Areas where larger employment growth is foreshadowed.
- Where the government or private enterprises have announced major investments.
- Areas that could see added demand for housing in the future.
6. Budgeting for your investment
Before you leap into the investment property market, you’ll need to:
- Do some homework to get all the facts and figures on what it will cost you – not only for today, but also into the future.
- Adjust your budget to reflect the additional costs involved with an investment property.
The start of any investment or financial plan must always begin with your budget. There’s not much advantage to owning an investment that chews up all your income and eats a hole in your savings.
Your budget is like a GPS – it always lets you know your position.