New investors to property are often under the impression property is safe, less risky than shares and will always go up. Unfortunately this isn’t always the case, so here are 4 tips to help minimise your risks when investing in residential property.
November 2, 2019
Ask yourself why you want to invest in a residential property – provide additional income, grow your net worth (that’s the value of your total assets less the balance of your debts), provide tax benefits because you’re on a high income. The property you buy needs to satisfy your ‘why’.
Remember you’re buying property to create wealth so don’t let emotion influence your choice of investment property. You don’t need to like the look of the property or for it to be close to where you live. Property investing is about making money so your decisions should be based on money.
When making a decision on how much you spend and invest in property think about what you can afford in terms of mortgage and interest repayments, ongoing maintenance, council rates and body corporate (if you’re buying a strata titled property), insurance and all the other costs associated with being a landlord.
Can your finances cope with interest rate increases? Major repair bills? Or the property being untenanted for a period of time? If you’re borrowing a substantial amount of the property value to negatively gear, you need to understand how much of your own cash flow you’ll be required to put in and for how many years.
Lower your risk by having buffers. For example, don’t borrow the full amount the bank will lend you and make sure you have cash set aside. It’s crucial to have some additional borrowing capacity or access to cash for unexpected expenses.
Get qualified advice about the best legal and ownership structure to use for the most effective tax and asset protection outcomes. Should the property be owned in your name, your spouse’s, jointly, or by a super fund or trust? Your individual circumstances both now and in the future should be considered.
While you’re getting advice you should also speak with a mortgage broker. They can find the right loan for you, how the mortgage should be structured (fixed, variable, interest only or P&I), what features will suit your needs and plan your repayment strategy.
Speaking with a financial adviser, or accountant, and a mortgage broker before you sign your name on the Sale and Mortgage Contracts can provide significant benefits, and help you avoid being locked into something that isn’t the most effective for your situation. Residential property is a significant investment so it pays to get it right.
Before clicking through realestate.com and heading off to those open inspections, set your investment criteria or ‘rules’ to ensure you purchase the right property for your needs and not be influenced by your emotions. Your rules might include:
If the property doesn’t tick all your boxes, wait for the next one.
Did you know residential property generally follows a 7 to 10 year cycle between its peaks?
Looking back over the past few decades, cycles in Australia have generally lasted about seven to nine years and property growth has peaked (also called property booms) – in the following years: 1981, 1987, 1994, 2003 and 2010.
Unlike other assets, property is so segmented that individual residential suburbs and states can have a different cycle to others. For example, Adelaide can be very different to Melbourne, Sydney or Perth.
Understanding where we are in a property cycle is important for your purchasing decisions, and should influence your investment time-frame i.e. how long you’re prepared to keep the property.
The cycles occur because of a combination of factors like the state of the economy, interest rates, unemployment levels and social and political issues.
The tips above refer to long term buying and holding (7 years or more) rather than buying with intent to renovate and sell. Most of us women have too many other things going on than to star in our own ‘The Block’ series.
Warmest,
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