5 Things You Should Consider Before Investing In Property

Five factors that can be the difference between joining the 5% of investors who make it past their 2nd property, and sending your portfolio into the red...

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When done correctly, investing in real estate can enable you to create a passive income, generate substantial amounts of equity and create generational wealth to give your family the best opportunity for financial security. When done incorrectly investing in real estate can cause financial hardship, It can be a burden on the family and set back retirement by decades.

Whether you're a seasoned investor or just beginning to explore the world of property investment, there are essential factors to consider that can help you make well-informed decisions. In this article, we'll delve into five key aspects you should be aware of before diving into your next property investment, all designed to help you make the most of your real estate endeavours.

  • Define Your Investment Strategy

The first step in any successful real estate investment is defining your investment strategy. Ask yourself, "What are my goals?" Are you looking for steady rental income, long-term appreciation, or a combination of both? Your strategy will help you determine how large your portfolio will need to be, the type of property to invest in, its location, and your budget.

When looking to create a strategy, you want to consider your timeline and goals.

For example, If someone wants to achieve $100,000 in passive income, then they will need to achieve a 10% yield on a $1,000,000 unencumbered property portfolio. While 10% is not achievable in any stable long market today, it would be achievable if you have a 10 year timeframe as rents will continue to grow over time. For example, if you have a $500,000 property returning $600 per week rent this would generate a 6.2% rental yield. If that rental income continues to grow at 6% annually over 10 years. The rental return would then be $1,075 per week which equates to 11.18% rental income. The other thing to consider is the portfolio needs to be unencumbered so for most people, they would need to sell a portion of their portfolio to pay off the debt on the remainder.

Taking the above into consideration, the strategy may be to purchase 3 properties at $500,000, 2 of those properties would need to generate yields of circa 6% while the 3rd property may be a high-growth property which you would sell at year 10 to pay the debt on the remainder. It’s important to consider that even with the portfolio being unencumbered you must still assume around 30% in annual holding costs such as property management, council rates, insurance costs, maintenance and utilities.

If your goal is rental income, then you want to ensure you are buying in a market that has stronger rental yields.

Rental yield is simply the difference between the income you receive from renting out your property minus the overall costs of your investment. This is expressed as a percentage and the greater the percentage the stronger the cash flow. The calculation used is weekly rent X 52, Divided by the price of property X 100.

For example, a $500,000 property returning $600 per week rent would be. $600 X 52 Divided by $500,000 X 100 = 6.24%.

Generally for those looking for higher cashflow properties, we suggest searching for properties that are generating gross rental yields above 5.7%. However, you must also assess what your holding costs are on the property. For example, you may find a property that is generating an 8% gross rental yield, however in Far North QLD your council rates and insurance costs could be $10,000 per year, or you may be attracted to a property that has an agreement in place with NDIS or NDH with gross yields above 10%. However, the management on those properties may be above 10% or the vacancy rate in those areas may be 5% - meaning your net yields are negative or extremely low.

You also want to ensure that the vacancy rates have historically been consistently low. There is no point in buying in a region where vacancy rates are currently 0.5% but 5 years ago they were sitting at 5% due to the region being heavily driven by 1 or 2 industries such as tourism or mining.

If you are focused on long-term appreciation then you may be happy to sacrifice a little bit of cash flow to ensure you are buying in a market that will grow at a slightly higher rate. Just be mindful, before deciding to sacrifice cash flow on your next investment property, speak with your mortgage broker and see how that will impact your ability to purchase your next property. There is no point in purchasing a property purely for capital growth which has no cash flow if that means the banks won't lend you any more money due to the income on your first property being so low. Remember the goal with any investment property is to ensure it's the right stepping stone to help you leverage into subsequent properties until you have reached the goal required based on your strategy.

  • Location, Location, Location

The age-old adage "location, location, location" couldn't be more relevant in property investing. The location of your investment property can significantly impact its success. Research the area thoroughly to understand its current and potential future market trends.

Look for regions that have the highest levels of population growth, highest levels of infrastructure spend and jobs growth, diverse economies, low debt-to-income and rent-to-income ratios, land scarcity or tight zoning laws ensuring minimal future supply for the region, low vacancy rates, high enough rental yield and dropping days on market. When you know what region you are going to purchase in, then it’s time to get granular with the data and make sure you buy in the streets with low crime rates, proximity to good schools and essential amenities like shopping centres, public transportation, and healthcare facilities.

You must then conduct a comparative market analysis to determine if the property is priced competitively. Assess similar properties in the area to gauge their rental rates and potential for appreciation.

For those with limited time for extensive research, there are online tools like DIYBA available that aggregate data from various sources, providing you with a comprehensive dashboard of information about the property you're interested in, making the process more efficient and accessible.

  • Financial Preparation

Before purchasing an investment property, it's essential to assess your financial readiness. Real estate investments often require a substantial upfront investment, so you'll need to have your finances in order. Here are some key financial considerations:

  1. Down Payment: Determine how much you can afford as a down payment. In general, a larger down payment can lead to better financing terms and lower monthly mortgage payments. Generally speaking any deposit less than 20% means as a buyer you will need to pay lenders mortgage insurance (LMI) this is a fee that the banks charge you as you are considered to be a higher risk - This fee can be added onto the life of your mortgage or you can opt to pay it upfront.

LMI is not always a bad thing and let us explain why. If we use the following example, a $500,000 property being purchased with a $50,000 deposit, you would need to pay approximately $8,200 in LMI. This can be added to your 30-year mortgage which equates to $273 per year. If a buyer chooses to not pay LMI and sits on the sidelines for another 2 years to save the remaining $50,000. That property would be $572,450 based on a 7% annual growth (national average). You can see that you would be paying $72,450 more for that property when it could have been purchased 2 years earlier for $508,200 including LMI.

For those who have enough cash to purchase with a 20% deposit but are looking to accumulate their assets more aggressively, then LMI may be a great tool to allow your cash to go further.

Let us explain: Assuming you have $130,000 in savings and you are able to borrow $900,000 from the bank. You could do a 20% deposit on a $500,000 property and when taking into account stamp duty and other upfront costs this would be as far as your money would take you. Alternatively, you could do a 10% deposit across 2 properties at $450,000 each. You would need to pay $14,742 in LMI over 30 years. However, you now have $900,000 worth of assets increasing in value. If that $800,000 appreciates by 10% you have made $90,000 equity. Whereas if your $500,000 property appreciates by 10% you have made $50,000 in equity. The capital growth you would achieve on your $900,000 worth of property would far outweigh the LMI you would need to pay, especially when compounded over time.

Please note: this is not financial advice, you want to take into consideration your risk profile, cash flow position and speak to a qualified financial advisor and mortgage broker to discuss in more detail your scenario.

  1. Financing Options: Explore different financing options, including traditional mortgages, investment property loans, and financing through partnerships or real estate investment trusts (REITs).
  2. Budgeting: Create a comprehensive budget that includes not only the purchase price but also ongoing expenses such as property taxes, insurance, maintenance, and property management fees.
  3. Reserve Funds: Establish a financial safety net for unexpected expenses or periods of vacancy. Having reserve funds can prevent you from getting into financial trouble if the property doesn't generate rental income as expected.

  • Due Diligence and Inspection

Never skip due diligence when purchasing an investment property. This process involves thoroughly researching and inspecting the property to uncover any potential issues or red flags. Some essential steps in due diligence include:

  1. Initial inspection: Personally inspect the property or if you are buying in an area you can't personally inspect, engage someone with previous experience to do the walkthrough video for you. Often this can be a property manager who you have chosen to work with, don't rely on the real estate agent's walkthrough video.
  2. Property due diligence: Ensure the property does not have an easement and is not in a flood zone. You must also check your council rates, insurance costs and check the title for any encumbrances, caveats or legal disputes.
  3. Building and pest Inspection: Hire a qualified inspector to assess the property's condition. They can identify any structural, cosmetic, or safety issues that may require immediate attention.
  4. Pre-settlement inspection: Ensure the property is in the same condition as it was when you initially inspected it, potentially tenants or owners have moved out and left a mess or damaged the property. Also in some states all plumbing and electrical needs to be in working order and this is checked on the pre-settlement inspection, if it is missed, then the new buyer would be liable to repair any issues.

DIYBA provides an interactive interface that helps you through each step of the due diligence process and guides you to the relevant sources of information.

Once you've completed your due diligence, the platform can calculate your holding costs for the year and compare them against the projected rent for the property, offering a comprehensive financial overview to inform your investment decision.

  • Property Management

When it comes to selecting the perfect property manager, it's essential to ask the right questions. Start by inquiring about their workload—typically, property managers handling 100 to 150 properties strike a good balance. However, it's also worth noting that a well-organised team of three managing 300 properties can be just as effective. Next, ask about their track record: How many cases do they currently have at the tribunal? This can be a solid indicator of their tenant selection skills. Lastly, try to gain insights into their tenant assessment process. Look for property managers who prioritise tenants with strong rental histories and excellent recommendations - as opposed to tenants who may offer more to make up for a poor rental history. Making the right choice in property management can significantly impact your investment success

While this process may initially seem confrontational, it's vital in making an informed decision about your property manager. The best property managers understand the significance of these questions and are more than willing to answer and explain their processes. It's a crucial step towards ensuring your investment property is in capable hands.

In conclusion, purchasing an investment property can be a rewarding venture when done correctly. By defining your investment strategy, carefully considering location, preparing financially, conducting due diligence, and planning for effective property management, you can increase your chances of making a successful and profitable real estate investment. Remember that real estate investment is a long-term commitment, so take your time to make informed decisions that align with your goals and risk tolerance.

Empower Your Investment Journey with DIYBA

DIYBA is an innovative online platform designed to simplify the property investment process. It offers investors access to valuable market insights, streamlines research, and helps identify high-performing properties in the right markets. With DIYBA, you can define your goals, conduct thorough market research, streamline your due diligence, and efficiently manage your property's financial aspects, all in one place. Empower your investment journey with DIYBA and take the first step towards building a robust and profitable property portfolio.

Invest wisely, and watch your investments grow.

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