Investing in Property
Buying an investment property has long been considered to be one of the most secure and effective ways to build wealth. However, it is fundamental to understand that it must be undertaken as a long term strategy to be successful.
Typically, investing in property begins with buying your own home first and then purchasing a second property from there. However, this does not necessarily need to be the case if you are living at home and earning good income. At Baggetta & Co we have several clients who have chosen to invest in property at a younger age than normal, and with the help and support of their parents, focus on wealth creation.
Well considered, sensible rental property investments are attractive for many reasons:
- Property can be less volatile than shares, normally, and tends to be regarded as a safe haven when other assets are declining in value
- Its’ potential to generate capital growth
- Its’ rental income to contribute to the purchasing costs and expenses incurred
- The tax advantages associated with negative gearing.
THE STEP BY STEP PROCESS TO SUCCESSFULLY INVEST IN PROPERTY
Andrew Carnegie, Business Magnate and one of the wealthiest men during the 1800’s, said that “90% of all millionaires become so through owning real estate”. If we consider the wealthiest families today, owning real estate continues to be a large part of their asset portfolios.
However, successfully investing in property will not come naturally to many of us. Therefore, to make well considered property investment decisions and grow wealth through property, it is important to take a structured step by step approach and get help when you need it.
STEP 1 – SEEK PROFESSIONAL QUALIFIED ADVICE ABOUT YOUR CURRENT FINANCIAL POSITION
The most important step, before you start looking for and investing in property, is to consult with an Accountant to answer some fundamental questions about investing in property and your particular circumstances.
An accountant, with experience in property investing, will:
- Review you financial position and identify your goals
- Ensure you can afford to invest in property
- Explain which expenses can and cannot be claimed as tax deductions
- Explain the differences between a repair and capital item, and their impact on your tax return
- Advise you on the best investment structure to suit your circumstances
- Provide advice on asset protection via corporate structuring
- Provide you with loan structuring advice
- Advise you on debt minimisation strategies
- Advise you on capital gains tax minimisation strategies
- Explain the benefits of tax depreciation schedules, etc.
Many property investors miss this step, believing it to be unimportant. However this step will ensure that you think more strategically about your investments and increase your rate of success in achieving your desired outcomes. Investing in property and failing can be very costly in money and valuable time to grow wealth.
STEP 2 – OBTAIN FINANCE PRE-APPROVAL
Before you start searching for an investment property, know how much you can borrow so you can set a budget and ensure that there will be no surprises with Full Approval.
Don’t miss out on a good investment just because you did not research how much you could borrow before you started looking for a rental property.
Also research which loan is right for you. There are many different loans to suit different situations. Your Accountant can help you with this.
STEP 3 – SEARCH FOR AN INVESTMENT PROPERTY
Having worked through the financial considerations, you are now ready to buy the property bearing in mind that you are not actually going to live in it, and making sure that you take a rational approach to the criteria you would have identified with your Accountant.
Invariably, the criteria you would most consider would include:
- Buying in a growth area – you will want to benefit from as much capital growth as possible
- Buying next to a ‘hot’ suburb – proximity to a ‘hot’ suburb could mean your suburb will be next to rise in value
- Buying next to special attractions – such as a beach, trendy café’ strip can have a ‘lifestyle’ appeal to certain types of tenants
- Access to transport, shops and leisure facilities – a property’s access to these can appeal to certain tenants.
- House or Unit, new or old – be sure that you have well considered each of these as options and that you have well considered their advantages and disadvantages as an investment property. For example, newer units can be a better proposition for landlords. They are easier to rent out, easier to maintain with no lawns to mow, etc and when things go wrong in the building, the expenses are shared with other owners.
- Extras – properties with a view are always more desirable that those without, and tenants like extras such as balconies, internal laundries, undercover parking and security.
Take the time to find a Real Estate Agent who specialises in working with Investors as they are more aware of what makes a good rental property. Also share your selection criteria and financial situation with your Agent to help locate properties that will appeal to you.
STEP 4 – THE BUYING PROCESS
Once your Offer to purchase has been accepted by the Vendor, the next phase of the buying process kicks in – exchange, settlement and completion. This is where you close the deal. It is the process wherein the house is signed, sealed and delivered and usually takes an average of 30 to 90 days.
At a glance it involves the following:
- Appointment of a settlement agent, or solicitor
- Exchange of contracts
- Payment of deposit
- A valuation and finalising of finance
- Completion of all inspection reports
- Completion of conveyancing
- Pre-settlement inspection
This step is very important to ensure that you do not get stuck with a property that has major problems. Unfortunately, if you are buying in a ‘hot market’ the vendor may refuse to perform this step diligently and walk from the deal, giving it to someone else. Be sure to carefully weigh any decisions you may make to shortcut this step and keep your goals in mind at all times.
STEP 5 – MANAGING YOUR INVESTMENT PROPERTY
You can do it yourself and save the management fee, but it is recommended that you do not.
Managing your own rental property can be time consuming and difficult to remain emotionally detached when you have tenants complaining to you, or you personally have to deal with damage to your property.
Using the services of a professional property manager can be more cost effective as they are up to date with what is happening in the market and what tenants are prepared to pay, they will have prospective tenants on their books and the experience to vet the tenant, and because they manage many properties they will have access to reputable trades people at normally cheaper service fees.
Property managers fees are tax deductible, and they also keep accurate and comprehensive information about your property which ensures your accountant has the right information each financial year to maximise your tax deductions.
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