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How To Get Your FIRST Investment Property RIGHT

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Buying your first rental property is undeniably a huge step for any investor. It is one of the biggest assets to purchase and if you put it more effort and time, it can be a great avenue to achieve passive income in the future.

But before thinking of becoming a real estate tycoon and building your empire, you need to start first with the basics. This means knowing how to find a good house in the right location, getting a mortgage, and choosing and filling it with good tenants — these are the important factors to consider in purchasing your first rental property.

Investment Property – is it right for you?

In buying a rental property – there are a lot of considerations that you should think about before you decide. It is not for the risk-averse. Operating costs, mortgage, tenant-related issues — these can either go any way: work for you or harm your investment. Truth to tell, there are generally more steps involved in owning a rental property versus stock market investing.

Several newbie investors have turned to stock investing as a place to put their extra dollars. Stock investing indeed has been a more popular choice as it is simpler to start, and your holding is liquid. And not many know that investing in real property is also a good investment choice. Under the right circumstances and with a good investing strategy, you may find it giving better returns, lesser risks, and providing a steady passive income while the property is accumulating capital gains.

We’ve put together some tips on how get your first investment property right.

Select the best property with the right price.

It is undeniably critical to buy a property at the right price and choosing one that will appreciate is likely the most worthwhile decision you need to make. As you know, real estate investing is all about capital growth.

You may find real estate quite challenging to price as compared to purchasing shares in which the company’s value is clear. But if you’re knowledgeable and determined, this actually gives you the chance to purchase an asset that’s below its real market value. The crucial step here is to make your research, check out which properties are in demand within and around the location, and you will know soon that you’d be very adept at determining what a property’s worth is, as well as knowing when it’s selling at a low price.

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Do not think of buying properties in an unfamiliar place, especially when some spruikers doing marketing for offshore or regional properties come to you. Many real estate agencies are paid fat commissions, so the value of the properties is in fact largely inflated. If there’s one property that you are eyeing and not sure of its actual value, we recommend that you check with your broker or your bank as they can provide you an objective valuation or even arrange an independent valuation for you. This kind of data can be useful in your negotiation with the vendor.

In case you didn’t know, both mortgage insurers and lenders provide useful data on various developments and locations – you must access such information so you can avoid the pitfall of a wrong choice for a property investment. Your focus should be consistent on achieving the perfect investment. Never decide on acquiring a real property for investment based on tax deduction benefits. Rather, always focus on having the right investment choice in all that you do.

It is quite critical that you maintain a solid stream of rental income from your property as this cash flow will help you manage holding and maintaining your investment, as well as provide you additional income.

Different types of residential real estate like land, houses, and apartment units can outdo each other in the long run. An example is a vacant land which may appreciate faster if bought in a location with limited properties but does not provide any rental income. On the other hand, investing in an apartment unit may mean fewer maintenance costs vs. investing in a freestanding weatherboard house. There are some areas that provide greater rental yields – but then again, do your research as generally these properties offer fewer capital growth breaks.

Another consideration is that the property must fit the renters’ demographics in the setting. For instance, if it’s close to a university or college, the demand for more bedrooms or studio units will be higher than a front yard for kids to use as a playground. A residential family property situated on a quiet street, nearby leisure parks and universities is generally more sought-after than a property on a full, bustling thoroughfare.

Do the math: Cash is king!

It is a fact that property investing has been established as a definite route to wealth, taking it from a medium to a much longer-term investment. Ensure that you can manage to cover and maintain all your repayments for your mortgage on a long-term basis. Choose not to sell your investment property unless you’re well-prepared. If you’re to be caught up in a bad financial situation, this may lead you to divesting your property in no time.

As soon as you own a property for investment, it is quite reasonable and inexpensive to maintain it and pay off the loan since you earn from the rent and subsequently, get tax deductions on related expenses in owning the property. And remember, that as time goes by, your rent increases, so does your income so expectedly, things will get better down the road.

Below is an illustration of what it costs to own an investment property. We suggest you study the cost of servicing the loan after-tax so you can see the actual costs:

Property Purchase Price: $500,000
Other Costs and Stamp Duty: $20,000
Total Amount of Loan @ 80 LVR: $ 400,000
Rental Income: $430 weekly

Ongoing Costs
Interest Cost at 5% per annum: $20,000
Rates: $1,500
Land Tax: $804.00 (Calculated based on land value)
Agents Fee at 7%: $1,565
Insurance: $ 800
The total cost is $24,669 (Less Rent: $22,360) [$430 weekly x 52]
The Annual Shortfall is $2,309 (Less tax deduction: $1,039) [assumption = tax rate of 45%]
The Annual After-Tax cost is $1,270 or $24.42 weekly.

To summarize: For this scenario, your investment property’s holding cost is calculated at only about $25 per week. In a sense, comparing this cost of holding the investment property is just like buying a bottle of wine or 5 cups of coffee.

Check out “Crunching the Numbers: Positive Cash Flow vs. Negative Gearing

Know all the taxes being utilised in property investing and include these in your computations. Seeking advice from your accountant is important in this manner as there could be changes over time. The following: Stamp Duty, Land Tax, and Capital Gains Tax should all be considered. Interest rates change over time and property investors should remember that as increasing interest rates happen, you can also generally expect that rents will also rise.

Banks get only as much as 80% of the rental income when working on whether you can afford an investment loan. This is due to expenses like vacancy costs and letting fees that you will also incur. This should be a ‘rule of thumb’ for you to remember.

Hire a competent property manager who will do the job well.

A professional property manager is also a real estate agent handling mostly tenant matters and keeping things organized for both you and the tenant. They assist you in getting the best worth from your property. A competent agent knows if rent should be reviewed or not. They will always help you with continuing advice, especially in managing well your tenants.

In addition, the property manager advises you on your various responsibilities and rights as a landlord and knows the tenants’ side as well. They should know the property laws. They’ll assist you with maintenance concerns, but you need to approve in advance all the costs to be incurred other than a few emergency repairs.

What are the other tasks that a property manager does? For one, they will assist in finding the right tenant for you. Other activities for the property manager are doing reference checks as well as ensuring the tenants do timely rental payments.

Do not get too much involved with tenants by interfering since they have certain rights as mandated by the law. Always respect your tenants. If you would like to make sure that your tenant is taking care of your property, consider attending the regular inspections scheduled by your property manager. You can also do independent inspections but just be sure to course it through your agent first and provide ample time of notice.

What’s great is that the income you pay to your agent is a percentage from the rental payment (taken from the rent) and yes, it’s tax-deductible.

Recognize your market including how the location works out for you.

Take note of the other existing properties in the vicinity and talk to several property agents and residents – they’ll make you aware if one portion of the street is better than the other. Make an effort for rival agents to know that you are checking a similar property so you can use their opinions. Most of the time, it’s a great trick to acquiring inside information. Doing the legwork is ideal. Ask advice for professionals whom you can rely on. You can also access some available independent information from credible sources like RP Data and SuburbsFinder – they provide information on regular demographics, rental fees, property prices, and local suburb reports.

Do your homework on what changes may be occurring in the area. The best information can come from the local council. For instance, a primary construction adjacent to your property will make it difficult for you to find a tenant at the ideal price or maybe a planned bridge could mean lesser traffic – and this may fast-track your property’s value quicker than you would expect it.

Choose the appropriate mortgage.

Various options are available when you talk about investment property financing, so prepare to get good advice on this matter. Surely, this can create a huge effect on your condition financially. Do you know that many take time to research mortgages with the belief of trying to save each month? It will be better if the time spent was on researching the local market instead, where bigger gains are expected. Some wise guys haggle seriously with a lender over a few dollars every month on their home loan but shell out instead maybe a minimum of $100,000 for the reserve price at some property auction.

An investment property loan’s interest is usually tax-deductible, but the fact is that some borrowing costs are not instantly deductible. You must know the difference. You must structure your loan accurately with the assistance of a competent financial advisor. For you to lessen your accounting costs as well as maximise your continuing taxation benefits, avoid combining a home loan with your investment property loan. This is a useful tip to avoid a costly mistake.

Depending on your situation, you may either select a fixed loan or a variable rate loan. You must study these two options cautiously before you make a final decision. Choosing a timely fixed-rate loan pays off but over time, it seems that the variable rates have been proven to be cheaper. The rate typically rises as property prices do; thus, this is great for investors having an edge on capital gains.

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Most investment loans need to be established as ‘Interest Only’ (versus Principal and Interest Loan) as this makes the tax effectiveness of your investment greater, more so if you also have a home loan — you just have to consider flexibility, too.

Why is this so? It is because ‘Interest Only’ loans work well for investment properties. Conversely, but for a ‘Principal and Interest’ type of loan, your negative gearing benefit is being reduced as you pay the amount of your loan. Check and consider also an investment loan that pays advance interest or with an Offset Account.

Take advantage of another property’s equity.

Buying real estate for investment has many sources: you may leverage from home equity or another property for investment equity. Equity means whatever money in your home that you own. How do you calculate it? Work out the variance of your property’s value vs. what your mortgage loan is. For instance, if your home is valued at $800,000, the remaining $350,000 is the balance to pay over the mortgage. You have $450,000 in equity. To add, if you utilise your current home’s equity, it will let you borrow additional cash against the property, thus, making your tax deductions bigger.

Negative gearing can work for you.

Negative gearing offers property investors some tax benefits whenever the cost of the investment surpasses the income it provides. The Australian laws let you deduct your maintenance and borrowing costs for the property against total income. In addition, you can have a tax benefit only if you earn other taxable income to start with. The point is while you are maybe on the losing side from the property, the benefit is such that this loss is being used to lessen the tax you need to pay on your other income. But do not go purchasing an investment property only for the reason of getting a tax deduction.

Make sure the property and facilities are in good condition.

Like with negative gearing, items like roof replacement or hot water facilities in the first few months of owning a home could make a critical impact on the profit and can hurt the cash flow.

You must hire a professional building inspector before buying a property and then make a detailed inspection every year thereafter to check for any potential problems in the future.

It is a smart move to engage a qualified, licensed tradesperson to handle this job and with adequate insurance to ensure you are protected from bad workmanship.

Know that it’s not always a bad choice if you purchase a property that’s not in the most excellent condition as you will have the opportunity to make improvements on the property like fixing or repairing the place, thus, boosting its value. This surely can increase your capital growth and improve ,rental income returns. This you can’t do when you buy shares.

Keep the property appealing to renters at all times.

You must keep the property appealing to renters all the time. You must keep the bathroom and kitchen, the two most important parts of the house, in good condition to guarantee that it is presentable to anyone. It pays to have neutral colours. It is an attractive property that will lure more quality tenants. The last thing you would want is to have bad tenants, right!?

One other point of view for debate is whether you should buy a property that you’d be happy and content living in yourself. For some, they think this will be more appreciated, but others couldn’t care less. So as not to become too much involved, we suggest you distinguish between what your home is versus your investment. Be reminded that your investment property is your tenant’s home, not yours.

There will be a possibility that when you need to sell your property – it will be attractive not only to most of the property investors but for owner-occupiers as well. This means that your market size is wider and bigger, thus, you can maximise your sale price. The owner-occupiers would be ready and willing to shell out more for the perfect property as it is often taken as some kind of an emotional purchase rather than a rational one.

Manage your risks well by thinking long-term.

No doubt, the property is one type of investment for the long-term. Therefore, you should not depend on property values increasing rapidly. The longer it is that you are bound to a property, the more advantageous it is to you as you get to build up your equity and then be able to move on and purchase the next one.

When growing your portfolio, just try not to get too greedy — going beyond what you can afford. Always find the right financial – life balance where you are still meeting that level of financial stability and still being able to enjoy life. We agree that financial security is important, but nothing compares to seizing life moments that matter the most.

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