Property Investment Tips

Investing in property most likely will not produce the get-rich-quick results promised by many late-night infomercials. Finding good investment property is an art that takes time to master. It takes a lot of work to achieve long-term success as a property investor, but for those that take the time to do their homework, make a plan and manage the property wisely, the rewards can be substantial.

To help make the most of your investment, Zar Mortgage Brokers would like to share some words of wisdom and a few tips for your future success.

TIP #1 – Get Educated

Education will help you avoid mistakes and learn new ideas. Read books, go to seminars, and learn from other investors.Once you start making money, you need to continue investing in your education. The return will be well worth it!

TIP #2 – Make a Plan

Making a plan will allow you to stay focused. The housing market is cyclical; there are high, low and steady patches. To achieve your ultimate goals, you must take it slow and steady.

Start With Reasonable Goals – To setrealistic goals, talk with experienced investors and get their honest opinion regarding profits and the average time required to complete the purchase. Based on this information and your current resources (cash and credit), set your long-term cash, cash flow, and equity goals for one year, three years and five years. To develop your plan, there are a couple of things that you need to take into consideration: money and results.

Money – Where are you going to get it? Many think that “you have to have money to make money.” That is not the case. You, however, will need either good credit or cash. Remember: It doesn’t have to be your cash or credit. It’s okay to start out with other investors until you get your feet wet. It is better to share the profits and have something rather than all of nothing.

Results – Where do you want to be in the future? What income do you expect from your property? How much money do you need to make? Will you be managing the property or will you pay someone else to manage it? If you pay someone else, how will that affect your bottom line? You need to answer these questions before you can start making your plan/setting your goals.

TIP #3 – Positive vs. Negative Gearing

Interest and other related expenses for your investment property are tax deductible. Positive gearing means that the annual rental income received from the property is higher than the annual loan repayments and costs. The benefit is that you earn extra income, but it is taxable. Also make sure you factor in the capital gains tax you will have to pay when you decide to sell the property. Be sure to consult with your financial advisor.

Negative gearing means the return from rental income is less than the loan repayments and costs. In some cases, the tax department allows the losses incurred on the investment property to be offset against other income as tax deductions. Tax laws vary from state to state, so if you are investing in property for the tax benefits, consult with your financial advisor to see if negative gearing is right for you.

TIP #4 – Finding the Property

To research the areas you are interested in, read the local newspapers, use reputable property research companies, surf the Internet and talk with people that know the market. Find out what the average rent is in each area, what infrastructure is in place and/or planned, and the past and expected appreciation for the area. Contact your Zar Mortgage Brokers Consultant to get Free Real Estate Reports for your target neighbourhoods. These reports are a MUST HAVE part of your research, as they tell you what other properties have sold for, and will save you from offering an above-market price for the property.

Taking the time to fully understand the market can, and most likely will, make a huge difference in your future return on investment.

You’ve decided on your target areas and done all of your research . . . now, how do you find the GOOD deals?

Use a Buyers’ Agent/Property Finder – Buyers’ agents know the market better than most and are a valuable resource to use for advice or for negotiating with sellers and/or their agents. They work with many buyers, so make sure you are diligent in staying in contact with them.

Farm Neighbourhoods – Successfulreal estate agents use a technique called “farming” to increase their business activity. They pick a neighbourhood or two and focus their marketing efforts within that area. You should try the same technique. Start with a convenient neighbourhood.

Drive the Area – Pick an area that contains the type of homes you are interested in purchasing. Spend a few weekends driving around the area. The goal is to learn about the neighbourhood, the style of houses and the average prices. This knowledge will allow you to make quick decisions as to whether a particular prospect is a bargain.

Attend Open Houses – Part of finding a deal is to know how to recognise one. Take a good look at the property and its physical features. After viewing a couple dozen, you will get to know the value of the properties and the different style of houses. When someone calls you about a house in the area, you’ll know its value by the description.

Visit “For Sale by Owner” Homes– Again, you are after the same information as when you attend open houses. The difference is that you may be able to find a motivated seller. Most people who sell a home themselves do not want to pay the realtor fee or just can’t afford to pay the fee. The owners are usually more willing to negotiate, especially if you are able to pay cash.

Look for Ugly and Vacant Properties – If a property is ugly or vacant, you will usually find a motivated seller. How can you tell if a house is vacant? Well, you could look in the window, but that might get you shot, bitten by a dog, or arrested! Look for the obvious signs first (overgrown grass, no shades or curtains, garbage scattered around the property, etc.). If you are not sure if a house is vacant, knock on the door. If someone opens the door, ask if they are the owner. If it is the owner, ask if he or she is interested in selling. If the person is a renter, ask for the name and telephone number of the owner. If the house is vacant, ask the neighbours if they know the owner. Most neighbours will be glad to give you the information because ugly houses hurt their property values.

TIP #5 – Consult with a Financial Advisor

You need to discuss your full monetary situation with someone with experience in advising on diversified investments. That’s because you need to make sure that your financial situation is improved by an investment property and that you can afford repayments. Remember, this investment needs to fit in with your long-term plan.

TIP #6 – Is it a Good Deal?

To determine if the property is a good deal, use this simple acronym: C.L.E.A.R.

Cash Flow – Will this property provide cash flow? That depends on several factors, such as the strength of the local rental market, the interest rate on financing and how much of a down payment you make. How much will your monthly mortgage repayment be versus your monthly rental income? How much will it cost to repair/renovate the property? What are the taxes and what are the expected annual maintenance costs? Is income important to you now or are you more interested in future equity growth?

There is no right or wrong answer to these questions; however, you need to consider all of these factors before making a decision to purchase. After answering all of the above questions, ask yourself one more thing, “How does this property’s potential cash flow compare to other properties?” For example: a $250,000 house that rents for $1,600 per month will provide a better income than a $500,000 house that rents for $2,000; although, you also need to take into account expected capital growth of each property. 

Leverage – Theless cash you put down on each property, the more you can buy. Use credit to enhance your financial position. If you are a long-term player, leverage will generally work in your favor if the markets in which you invest appreciate in the long run and your income from the properties can pay for most of the monthly expenses. If a property goes up in value, your rate of return goes up exponentially. However, if the property goes down in value and you have a lot of debt on it, this can result in negative cash flow.

Equity – The money value of a property in excess of claims or liens against it. There are many ways to create equity, but buying into equity is your best bet. Find a motivated seller that wants out of the property and is willing to give up some or all of the equity. Another way of building equity is to purchase a property that needs repairs that can be done for 50 cents on the dollar. For example: if the property needs $10,000 in repairs/renovations, make sure you get a $20,000 discount on the price.

Appreciation – Buyingin the right neighbourhoods and in the right stage of a real estate cycle will result in appreciation and profit. However, timing a real estate cycle is difficult and can be very speculative. Buying properties without equity or cash flow solely for short-term appreciation is very risky. Buying for moderate, long-term (10 to 20 years) appreciation is safer and easier. Look at long-term neighbourhood and city-wide trends and pick areas that will hold their values and grow at an average of 5% to 7% percent annually.

Risk – a four-letter word that most investors don’t want to think about, however, you must always consider the odds of a loss. What if the property losses value? What if you aren’t able to rent the property? What if your variable loan rate goes up? What if your assumptions were wrong? Can you handle a negative cash flow or will it break the bank for you? Do you have a plan “B”? Expect the best, but always prepare for the worst.

A smart investor considers cash flow, leverage, equity, appreciation and risk. Remember, whenever you look at a property, think CLEAR.

TIP #7 – Ask Yourself, “Am I Ready to be a Landlord?”

Deciding if you’re ready to be a landlord is a question that only you can answer. Educate yourself and be sure of what you’re getting into before plunging in head first. Seek help from qualified experts in the rental business. The more mistakes you can avoid, the faster you will reach your goals. Some things that you need to consider are:

The Lease – Alease is a legal document that outlines the responsibilities of both the tenant and the landlord. It also includes all of the terms of use. Your lease needs to be very detailed.

Screening Applicants – Check the applicants’ credit and employment to ensure they can afford the rent. Make sure that you have a rental application form and that you CHECK references. The nominal fee that you will pay for a credit check will be well worth it.

Rent – How muchwill you charge? You need to consider your mortgage payment, taxes and on-going repairs when determining what to charge. You will also need to check the local markets to see how much rent other landlords are receiving for similar properties. The best way is to look at the classified ads in your local newspaper.

Repairs – Eventually, there is going to be something that needs repaired. It could be as minor as a toilet that doesn’t flush right or as major as a broken air conditioner. Plan ahead for the expenditures and have the names and numbers of local handymen and repairmen handy.

Property Manager – Willyou manage the property or hire someone? If you hire someone, what will it cost and how will it affect your bottom line? Most people start managing their properties by themselves. If you have time and are comfortable with doing all the work, that is the way to go. If you are not comfortable with interviewing people or just don’t want the hassle of taking care of the little stuff, you may want to look into hiring someone.

If these factors are of concern, you may wish to look at lower risk investment property options like Defence Force properties, which normally have long-term guaranteed rent (normally 9–12 years). Other alternates are National Rental Affordability Scheme (NRAS) Properties, which have similar rental guarantees. There are other rental guaranteed options in the market from time to time, so you may wish to investigate these options. You should speak to a financial advisor regarding these options to make sure your investment suits your future plans and goals.

TIP #8 – The Contract

Once you find the property you want to purchase, the first thing you need to do is give a copy of the Contract of Sale to your solicitor or conveyancer. It is unwise to enter into any contract without obtaining legal advice.

When you make an offer, most real estate agents will ask for an initial deposit (a small portion of the full deposit). If you haven’t signed and exchanged contracts, the deposit does NOT hold the property. However, it is refundable if you change your mind. But note that you could miss out on a good deal if someone else exchanges contracts before you. If you need time to think about it, you can make arrangements through your solicitor/conveyancer to exchange contracts to include a cooling-off period—this allows you to secure the property, and gives you five days to change your mind and cancel the contract.

A word of caution: It is very risky to give the deposit directly to the seller. Your solicitor or conveyancer will normally pay the deposit to the real estate agent, and it is held in the agent’s trust account.

Other things that you need to do immediately:

  • Give your bank or mortgage broker a copy of the contract
  • Arrange for building and pest inspections
  • Organise insurance (the buyer is responsible for insurance as of 5 p.m. on the first business day after the contract date)

The last thing that needs to be done just prior to settlement is a final inspection of the property to ensure there hasn’t been any damage and all fixtures, etc., are still in place.

TIP #9 – Be Financially Prepared

If your financing is pre-approved, it will give you an upper hand during negotiations. Most sellers want to get to settlement as fast as they can; therefore, they will sometimes take a lower price and/or give in on some aspects of the negotiation. Also, by being pre-approved, it speeds up the process and allows you to move quickly on potential properties.

Ensure you’re financially ready to cover the mortgage while the property is vacant. Remember, tenants come and go. You may luck out with a long-term tenant, but, as we said before, expect the best, but always prepare for the worst. You will also want to ensure you are prepared for unexpected repairs, increased interest rates and taxes.

TIP #10 – Maintain or Flip

Flipping is buying a property and reselling it as quickly as you can. You find a great rehab opportunity; get it well under market value; repair/renovate it; and resell it. If you plan on flipping a property, always have a plan “B”—Expect the best, but ALWAYS plan for the worst.

General Advice Warning

The contents of this website have been prepared without taking account of your objectives, financial situation or needs. Because of that you should, before taking any action to acquire any of the financial products mentioned on this website or to transfer your personal business to Zar Mortgage Brokers, consider whether that is appropriate having regard to your own objectives, financial situation and needs.