Real estate can be a great way of building wealth for the future. But you don’t want to jump into a purchase without a proper plan in place.
Otherwise, you may make a very expensive mistake, because property investment is not a risk-free exercise.
Here’s what you need to consider before buying an investment property:
1. Your end game
Presumably, you want to invest to make money. But what financial goals are you trying to achieve?
- Produce capital growth?
- Generate passive income?
- Save for retirement?
- Make a quick profit?
- Something else?
Depending on your goals, you may want to buy and hold for the long-term, so you can enjoy price growth and rental growth over the following decades. Or you may want to buy a rundown property, renovate it and quickly flip it.
Both options can work well, but they suit very different goals.
2. Your finances
Before you go shopping for a property, you need to be financially prepared.
- Do you have a pre-approval?
- Have you considered additional costs, such as stamp duty, conveyancing and buyer’s agent fees?
- Do you have a financial buffer in case interest rates rise, you lose your jobs or you get hit with an emergency maintenance bill?
Ultimately, an investment property is supposed to generate a return on investment. So crunch the numbers to make sure that the capital growth and rental income you earn will compensate you for the interest payments, council rates, property management fees and other expenses you have to pay.
3. Your risk profile
Property investing is like any other investment – it comes with risks. While the property market is generally much less volatile than the stock market, you should still expect fluctuations. There will be times the market dips, but if you’ve bought a quality property in a quality location, there’s a good chance your property’s value will increase over the long-term.
4. Your investment property’s location
One of the mistakes new property investors make is buying the right property in the wrong location.
If the property doesn’t appeal to owner-occupiers, its price growth will be limited. If the property doesn’t appeal to tenants, you’ll struggle to rent it out.
Experienced property investors often say that a property’s performance is 80% down to the location and only 20% to the home itself.
5. Your ideal tenant
Again, the property you buy needs to appeal to renters. So think carefully about the type of person you want to attract.
For example, an inner-city apartment would suit a single professional, a four-bedroom suburban house would suit a family and a smaller cottage would suit older downsizers.
You also want to vet your tenants properly to make sure they will be pay on time and treat the home with respect.
To be a successful property investor, you need to keep two main things in mind.
First, think with your head, not your heart. Your job is to buy a profitable asset, not a home where you could see yourself living.
Second, make sure your investment decisions align with your strategy and risk profile.
Well Money can help you get pre-approved for an investment loan. Fill in our short online form or call 1300 899 724 to talk to one of your home loan experts.