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Start your investment journey on the right foot with these property investment dos and don’ts.
Property investment is a preferred mode of wealth creation across the world. However, not every investor ends up building an expansive property portfolio. While some investors are satisfied with a second or third home, there are others who own several properties and continue to buy more.
According to ATO statistics, there are about 2 million individual investors in Australia. Out of this, about 75 per cent investors own only one investment property. And, despite the success stories that you hear, only a handful of investors, around 37,000 in number, own five or more rental properties.
So, what sets apart a property baron with an expanding property portfolio from an average investor?
Luck? Well, maybe to an extent, but smart financial planning is what we’d be tempted to say!
In general, investors who taste success are mostly those who enter the market for the long-term and have a financial strategy in place.
According to Michael, a HashChing mortgage broker, “The correct lending structure is critical to ongoing investment, as is finding the right property to match your requirements.”
So what can you do to optimise your investment journey and achieve your goal of owning multiple investment properties?
Make educated decisions - First and foremost, property investors must have a keen knowledge of the real estate markets. If you intend to invest in property, start by reading property investment blogs, connect with investment experts, and also read some property reports to understand the property market in which you intend to buy. By reviewing the historical performance of several areas, you can identify investment opportunities in markets that are at the bottom of their cycle, and are currently recovering. If you buy in a market that is at its peak, it would be years before you realise any capital appreciation on it.
Aim for a positively geared property – Negative gearing is not an investment strategy. While it enables you to minimise your losses by offsetting them against your taxable income – your asset remains a loss-making asset. On the contrary, if you invest in a positively geared property, you will have a better cash flow that can be used to expand your portfolio.
Get your loan structure right – According to experts, your choice of lenders is closely tied to the success of your investment strategy as it is going to affect your borrowing capacity for subsequent loans. Therefore, setting up your loan correctly is crucial to building a property portfolio.
Let’s understand this with an example.
Jim wants to buy an investment property and contacts a mortgage broker. His broker explains to him that each lender has unique lending criteria and will assess his loan application differently.
After going through Jim’s application, his broker tells him that Bank A might decide to lend him $400,000 while Bank B might only agree for $300,000. Naturally, Jim would be tempted to borrow from loan A, which is a common mistake property investors make.
Jim’s broker says, “If you aim to buy more properties in the future, Bank B is the best to start with. Most investors hit the serviceability wall after purchasing two or three properties. To avoid that, you must start borrowing with banks with stricter lending criteria, moving on to banks with less restrictive rules as your debt (and portfolio) grows.”
He adds that investors must also avoid cross-collateralising their loans to keep their portfolio properties independent of each other and secure.
Here are a few common pitfalls to avoid on your investment journey:
Not researching enough
There is no excuse for not researching enough. In addition to your property agent’s advice, use multiple sources that offer independent research into price data and suburb information before you buy a house. Don’t forget to consider the ongoing charges and other important figures such as rental yield and vacancy rate to calculate your ROI.
Borrowing without safety buffer
Taking an interest-only loan without a safety buffer is a risky proposition. Note that your monthly repayment can increase by three times at the end of your interest-only period. Therefore, it is vital to plan your cash flow before you opt for an interest-only loan to fund an investment property.
Besides planning your mortgage, it is also crucial to set the right structure for your investment loan – for example, borrowing through a trust or SMSF.
Using your heart over your mind
Never buy an investment property because you really like it. Crunch the numbers to choose a high-yielding property and be ready to walk away if the house does not fit your budget – irrespective of how much you like it.
Not having a strategy
Most people buy properties to generate wealth by investing in a stable asset class. However, you must also consider what stage of life you are at while investing. For example, do you have young kids? Or, are you thinking of retirement in the next ten years?
It is important that you start investing with a clear goal in mind – and also consider exit strategies – so that you have the cash flow you need at different stages of life.
It is often said that buying your first investment property is harder than purchasing subsequent ones. In any case, having an expert by your side could help you build a better investment strategy and increase your chances of success as an investor.
Whether you are investing in your first property or next, you can benefit from working with a mortgage broker. At HashChing, we have specialist investment brokers who are aware of complex financial structures, and can help you set up your loan correctly. An experienced broker can also help you avoid the serviceability wall by making a greater number of loans available to you as your portfolio grows.