If you’re thinking of buying your first investment property or feel like you need to improve from a previous attempt, it’s important to start with the basics. It all comes down to thorough research and well-thought planning.
You might already know a little something about the property market – you’ve read a few articles, talked to a few friends, or already own a home yourself. But until you’ve actually become an experienced investor, there are countless ways your first few property purchases could go wrong.
The wrong type of property, location, or just having poor timing can make all the difference.
In order to get on the fast track to success, any property investment expert will tell you it all starts with research and setting your own goals.
Flynn De Freitas, principal of boutique property research and investment firm, Omega Investments, says there are three golden rules to follow:
- Know your risk/reward profile
- Know your investment strategy
- Find the right property that suits your strategy
It’s the first rule, knowing your risk/reward profile, that is most important, he says.
“Everyone wants to double their money in three years, however investing in property needs to be made with informed and sensible decisions,” he says. “The saying, ‘A fool and his money are soon parted’ applies to all areas of investing, including property – not just higher risk assets like shares.”
Gambling on a speculative mining town promising huge returns, for example, can go terribly wrong if suddenly the demand changes. Sticking closer to capital cities, however, will almost certainly offer a more steady gain, albeit with a lesser chance for doubling your money in a few years.
“This said, everyone can invest with a good degree of safety in property when they first determine their risk reward profile,” says De Freitas.
When determining risk, investors also need to consider when they will retire. Most investors don’t consider the age they want to retire, but it should play a role no matter what their age is, De Freitas says
“This is really a function of where you are now and how long before you hit 65 years of age,” he says. “If you are under 40, then you might want to aim to retire young, perhaps by 50, given you have time to take a few more risks and still recover financially should anything go pear shaped.”
Those around the age of 55 or above should choose a more conservative strategy, he says.
Knowing where you want to be will make your property search all the more clear.
First steps
One of the first things to consider is to understand your own profile and experience level. Be honest with yourself and don’t overestimate your ability to comprehend the property market, as is common to do.
“Mostly likely, you will have a relatively low level of experience but hopefully a high level of enthusiasm,” says De Freitas. “That’s fine but just understand that the higher the profits from property investing, the greater the potential risk. The only way to reduce this risk is to have an equally high level of experience.”
Like in many things, a beginner in investing should start small with lower risk strategies, he says. Property investors don’t usually get rich overnight. They do it with patience and steady and careful growth to their portfolio.
Jo Chivers, director of Property Bloom, says investors should also start identifying a particular area they want to invest in early on.
“I think you’re better off focusing on just one area,” she says.
Once you’ve narrowed it down, it’s important to look at the data, such as how house prices have performed recently as well as what kind of rental yields can be expected and where vacancy rates are at.
“There’s so much data available these days, so there’s really no excuse for people not to do it,” says Chivers.
It might be an area the investor is already familiar with. If it is not, and perhaps in another state even, don’t hesitate to go and visit it before you truly go forward with any purchase, says Helen Collier Kogtevs, director of Real Wealth Australia.
Statistics can tell you a lot, but they need to be teamed with local knowledge, says Chivers. Investors should speak to the local council and residents.
“Speak to anyone you can find, really,” says Chivers. “Just find out what’s happening in the area. Historical data might not truly reflect all that is happening.”
Using either numbers or speaking to locals, you can determine what the type of market will be for renting your property. You want to be sure there are plenty of people in the price bracket that you will be renting for.
If you are just looking for capital growth, look for a property where you can sell quickly and at a fair price if necessary. Sticking near the median price range and with the right size in terms of number of bedrooms and bathrooms can keep demand for your property high.
Plotting your strategy
Aside from location, you need to strategise ahead for what type of property you will get, be it a unit or a house, and whether you’ll live in it, rent it out, and how long you’ll plan t keep it.
The current housing climate lends itself to renovations, says Chivers.
“I think it’s a really good time to add value,” she says. “I think we’re right in the early stages of recovery.”
Investors should be wary of overcapitalising their investment, however, by doing unnecessary renovations that don’t add value above the costs. Estimate the cost of your renovations and compare that with how much added value you expect it truly to make. It’s very possible to renovate and actually lose value if it limits the demand.
“There’s no point putting in premium fittings if you’re not going to get the return on it from the rental market,” Chivers says.
Investors should remember to keep renovations consistent with the local property market.
“Investors coming from capital cities tend to renovate from their standard rather than the market standard,” she says. “It’s important to remember that you’re not living in the house, though.”
While renovations can take time, you might also consider requesting access to an investment property to do the work before the move-in date, thus saving down time, says Chivers.
She says adding an extra bathroom or kitchen to an investment property right now could see a major increase in rent. Rental yields are already way up in many suburbs as vacancy rates are down near 2% or lower.
Another idea would be to purchase a large piece of land and subdivide it to create greater equity, says Chivers, noting it’s a popular strategy in the Hunter Valley north of Sydney.
If you’re developing land, find time before any purchase to speak to a surveyor and find if there’s easements on the property. Also speak to the local council and ask if its in a fire or flood zone, or if your plans would be considered suitable for the neighbourhood. Check the land as well and see if you’d be building on any kind of slant.
Base it on timing
Investment purchases should always be based on a strategy of timing the market. Chivers says buying off the plan is a good idea now.
“Right now, there’s very little development going on,” she says. “By the time that developer finishes the project, say 12 to 18 months later, we’ll probably be in a good upswing in the market.”
By doing so, there is an element of risk involves, she warns. But in general, those with the means to do it, now is a good time to make an investment purchase
“Interest rates are dropping and rents are rising – this is reward time for investors,” she says. “We’ve had some tough years with rates going up, but now is just a good time to relax and just enjoy your investment.”
A longer term strategy usually works best, rather than looking for prospective quick jumps in value, says Chivers.
“My strategy is just long term holds with good property that is well located,” she says. “In 10 years, if you’ve bought in a good place, the property will probably at least double in value.”
Knowing when to sell is also important. Now in particular is not such a good time, as prices have slumped across Australia. Unless you have to sell for financial reasons, its best to wait until the market recovers at a down time like this, says Chivers.
“Don’t sell now because we’re just about to start a new cycle,” she says.
Even renovations might not be necessary due to the extremely low vacancy rates in most cities.
“At the moment, you can increase rents with doing very little,” says Chivers. “If the property is in good condition, I would just leave it for now and just reap those rewards.”
