Property investment is one way to build life-changing wealth. But if you’re a first-time property investor, it can be a confusing and daunting process.
How can you avoid making rookie mistakes?
Here are five questions every first-time investor should get answers to before sealing the deal on their first property.
1. Where should I buy?
When choosing a property, the common assumption is that 80% of a property’s long-term price and rental growth is based on the property’s location rather than the actual home itself.
Here’s what to consider when assessing a location:
- Is it a 20-minute neighbourhood? Most people don’t want to travel far to buy groceries, grab a takeaway, catch a bus or drop their kids at school.
- Is the population growing? This may indicate that the area is becoming more desirable.
- Is the crime rate low? Safer neighbourhoods typically attract higher rental prices.
- Is the area being improved? If upgrades to public infrastructure are planned, or the area is becoming gentrified, the value of properties may rise.
2. What should I buy?
Should you buy a house, unit, townhouse or duplex? And should you buy a new or established property?
When comparing the typical house with the typical unit, houses tend to have higher capital growth and lower yield, while units tend to have lower capital growth and higher yield.
New builds are often more appealing to tenants and offer investors greater tax benefits, but they can be overpriced. On the other hand, an established property may cost less to purchase. An older property may require some renovation, but those upgrades could significantly boost the property’s capital growth in the long term.
The variables around property investing differ from state to state and city to city. To choose the right investment property, you’ll have to research the area where you’re planning to buy and there are a number of things to consider before buying.
3. How should I buy?
Nothing stops you from doing your own location research, property inspections and agent negotiations. However, being a first-time investor, it can be overwhelming, and you may overlook crucial things.
Consider working with a buyer’s agent. Buyer’s agents are market experts and experienced negotiators.
You should also consider having a certified property inspector examine the property for any defects, pests or other underlying problems that could be costly to fix later on.
4. How should I manage my property?
Will you manage the property yourself or hire a property manager? If you’re buying in another state or plan to buy more than one property, managing these properties yourself may not be practical. That’s where property managers come in.
Property managers can help evaluate tenants, collect rent and arrange maintenance and repair work when needed.
When hiring a property manager, it’s generally a good idea to pick one that’s reputable and experienced. They should be able to manage administrative tasks independently, conduct property inspections and report any property or tenant problems as they arise.
5. How will my loan be structured?
Choosing the wrong loan structure could make it harder to refinance in the future and even result in a higher tax bill. It could also make it hard to qualify for future home loans, limiting your ability to buy future investment properties.
So think carefully about whether to choose an interest-only or principal-and-interest loan, and whether your interest rate should be fixed and variable.