Tip one: the first step isn’t related to either the investment or even the property itself, says Michael Beresford, director of investment services at property investment firm OpenCorp. Remember to interview your mortgage broker. Photo: Michelle Smith “That’s a common mistake that people make,” says Beresford. “A lot of them have that wonderful motivation to get started and begin that journey, but typically what that means is an emotional or an impulsive purchase on a weekend at an auction without having done the due diligence around their own situation.” He recommends first getting an understanding why investment is important to you. Work out what you want your property portfolio to achieve, and then add the hard numbers around that. “You want to make sure the properties you buy as investment shouldn’t be properties you would like to live in – they’re purely vehicles to be able to get you the financial outcome that you want,” says Beresford. “So really being clear on what the end looks like and what good looks like in terms of how much you want is the key first step and then shortly thereafter, understanding what’s actually possible from a borrowing perspective.” Older investors with smaller mortgages or those with children wanting to enter the property market would be happier to see prices drop, experts say.
Photo: Chris Hopkins Finding a mortgage broker with experience in helping investors is crucial. Ask for referrals, do some online research or read industry publications. “Then basically interview them to find out what their client base looks like, what are the kind of loans they set up and then how they would recommend setting up an investment structure,” says Beresford. If the first broker you go to gives you a knockback, don’t be prepared to take that as gospel, says Beresford.
Ian Hosking Richards, the CEO of Rocket Property Group, says many first-time investors may have concerns, such as interest rates rising or a future tenant trashing the place. But those are usually minor issues for experienced investors who know how to mitigate the risks, he says. You’re more likely to overspend on a property you’re emotional about. Photo: Supplied “The worst case scenario rarely eventuates. If you do nothing you will probably work for a dog for 40-plus years and end up with little, so I think that Australians should be driven more by the fear of ending up without enough money, rather than the fear of making a mistake.” Richards says a decent mortgage broker will be able to tell you of the steps needed to qualify for a loan.
From there, you can work out your own timeframe. “I would always recommend a pre-qualification rather than a pre-approval, as this does not result in a credit enquiry on your file, and allows the broker a degree of flexibility, so when a suitable security property is found, the right lender can be found,” he says. So, do you need to earn big bucks to become a property investor? Not at all, says Beresford. “Some of the most successful investors that we’ve dealt with have just been really diligent and stayed focused on what they want to achieve. They don’t listen to the outside influences; they don’t get put off by, you know, Donald Trump getting elected or whatever APRA might be doing.” However he says that finding properties that are low cost to hold, preferably taking no more than $50 out of your pocket each week, is key. As is focusing on future capital growth rather than tax benefits, and leaving your emotions at the door.
“If you buy a property that you’re emotional about, chances are you overspend on it. Chances are that the rental yield and the tax benefits won’t be as good as what they could be and unfortunately the novice investor ends up having to cover that shortfall out of their pocket,” he says.
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Real estate has produced many of the world’s wealthy people, so there are plenty of reasons to think that property is a sound investment. But like any investment, it’s better to be well-versed before diving in with hundreds of thousands of dollars. Arm yourself with the information below before starting a new career as a tycoon. (See also:.) 1. Make Sure it’s for You Do you know your way around a toolbox?
How are you at repairing drywall? Or unclogging a toilet? Sure, you could call somebody to do it for you, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money. If you’re not the handy type and you don't have lots of spare cash, being a may not be right for you. (See also: ) Your first property will consumer lot of your time as you learn the ins and outs of being a landlord. Think of it as another part-time job.
Do you have the time? Pay Down Debt First Savvy investors might carry debt as part of their investment, but the average person should avoid debt. If you have, unpaid medical bills or have children who will soon attend college, purchasing a may not be the right move at this time. Get the Down Payment Investment properties generally require a larger than owner-occupied properties, so they have more stringent approval requirements. The 3 percent you put down on the home you currently live in isn’t going to work for an. You will need at least 20 percent, given that isn’t available on rental properties. Beware of Higher Interest Rates The cost of borrowing money might be cheap right now, but the on an investment property will be higher than traditional mortgage interest rates.
Remember, you need a mortgage payment that’s low enough so that it won’t eat into your monthly profits too significantly. Calculate Your Margins Wall Street firms that buy distressed properties aim for 5 percent to 7 percent returns because they have to pay a staff. Individuals should set a goal of 10 percent. Estimate maintenance costs at 1 percent of the property value annually. Other costs include insurance, possible, and monthly expenses such as pest control and landscaping. (See also: ) 6.
Don’t Buy a Fixer-Upper It’s tempting to look for the house that you can get at a bargain and flip it into a rental property. But if this is your first property, that’s probably a bad idea. Unless you have a contractor who does quality work on the cheap – or you’re skilled at large-scale home improvements – you’re likely to pay too much to renovate. Instead, look to buy a home that is priced and that needs mostly minor repairs. Calculate Operating Expenses Overall, operating expenses on your new property will be between 35 percent and 80 percent of your gross. If you charge $1,500 for rent and your expenses come in at $600 per month, you’re at 40 percent. For an even easier calculation, use the 50 percent rule.
If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses. Determine Your Return For every dollar you invest, what is your return on that dollar?
Stocks may offer a 7.5 percent while may pay 4.5 percent. A 6 percent return in your first year as a landlord is considered healthy, especially given that number should rise over time. Get a Low-Cost Home The more expensive the home, the higher your ongoing expenses will be. Some experts recommend starting with a $150,000 home.
Find the Right Location Look for low property taxes, a decent school district, a neighborhood with low crime rates, an area with a growing and plenty of like parks, malls, restaurants and movie theaters. (See also: ) The Bottom Line Keep your expectations realistic. Like any investment, a rental property isn’t going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake. Consider working with an experienced partner on your first property or rent out your own home to test your landlord abilities.