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Investing

It has been a long held belief in Australia that the acquisition of property is a foolproof way to financial security.

The old rule of buying one property and watching as inflation diminished your debt to the point where you could then use your increased equity to buy another does not hold true anymore. The theory being you would end up with a string of investment properties all increasing in value every year. You wish!

There is no question that property can be a great investment, but it is not foolproof, nor automatic and needs a long-term time frame to ensure you can achieve the return you have targeted.

Types of investment properties:

In general, an investment property will put you in line for many of the same costs you’d have for buying your own home – stamp duty, conveyancing, valuation costs and real estate advertising. The costs of acquiring or disposing an investment property are not tax deductible.

The biggest cost of an investment property is buying a property that you have trouble renting and then trouble selling off.

So what are the main factors to look for in buying an investment property?

No doubt you’ve already heard of the "location, location, location", property mantra.

There’s no doubt that the most important factor when buying property is to buy where people want to live. This is never more important than when you are talking about investment property. In order to make sure you always have tenants vying for your property – and therefore no expensive, extended vacancies – you need to know where people want to live.

That’s not just limited to the penthouse apartment located on the Esplanade overlooking the ocean – for most people that is just fantasy. Where people really want to live is near the amenities they use every day such as:

Of course nice views, privacy, and peace and quiet, are added attractions.

There has been a huge move back to the centre of cities, with many Australians now begrudging commuting and wanting to live close to the action. While this has been particularly evident in our capital cities this phenomenon is also evident in Cairns with units close to the CBD very popular.

Experts say the high inflation, population boom days that made property a no-brainer investment are gone. To do well out of investment property these days, you need to be much pickier, and you need to be prepared to do more research.

So what makes an ideal investment property?
Location has already been discussed but being in nice street and an area where more and more people want to live is a key point.

It is essential to become familiar with the property statistics for the city you are considering investing in. For example, vacancy rates are an important indicator for would be investors. This information can be obtained from reputable rental agencies or valuers. This is the best indication of the supply and demand factors, which will influence your return on investment, or whether there will be falling rents in this area.

For an investment property you will also want a low-maintenance place, and one that does not need a lot of money spent on it.

Of course if you can find a property that is already tenanted that can make things easier, but it essential you have a reliable and talented property manager to look after your investment.

Accountants and consultants can play with figures and statistics to show anything.
The great thing about mathematics is that it is consistent - 2+2 will always equal 4. However in the property investment world things are rarely consistent because of the biggest variable of all – the performance of the tenant.

This is where a good agent can lower the risks associated with the performance of tenants.

So how does real estate as an investment compare to other forms of investment, such as shares and fixed interest?
Property on average has returned about one to three percent above the rate of inflation. This doesn’t mean there haven’t been sustained periods of much higher returns, but on average that’s about what all the experts predict.

Think outside the residential property square – commercial/industrial!
Some of the best property returns can come from industrial or commercial property i.e. office space. While it requires far more money to get into, there are some possibilities, which may not cost as much as you may think.

For example, think of houses on main roads near hospitals. Many are converted into doctor’s surgeries or other services for outpatients. Consider a small shop in a good area.

Negative gearing won’t save you if your investment is a dud!
We can’t stress this enough. The less than ethical activities of some marketeers and financial advisers in promoting the tax benefits of negative gearing have left many people financially struggling. Don’t be tempted solely by the tax breaks and negative gearing. Remember an investment property must stand up as an investment on its own account.

Buying a renovator’s dream as an investment is usually trouble!
The older properties get, the more you need to spend on them and the higher the chance that you won’t be able to attract the sort of long-term tenants you need to made your investment work.

Remember the golden rule of property management – bad properties attract bad tenants, (and are usually owned by bad landlords and managed by bad agents).

Look at newish properties and ones that don’t need much maintenance. Chances are that will suit both you and your tenant.

Avoid buying a nightmare property!
Do yourself a favour: get a reputable building inspector to check the property and give you a full report before you buy it.

It will cost between $150 to $300 but could save you thousands later. If there are serious defects you then have the option of offering a lower price or making fixing the problems a condition of the sale. At least you know.