One of the reasons people invest in property is that it provides both ongoing rental income and the potential for capital gain, both of which are highly appealing.
But how do you know if buying an investment property is right for you? And if it is, what type of property should you buy?
Know your goals
Before you decide to buy an investment property, you should think about what you’re really trying to achieve with your money.
Property is typically a long-term investment with significant up-front costs (e.g. stamp duty, legal fees, building and pest reports). Also, history tells us that property values fluctuate over time,2 so it can potentially take years for a property to show any capital gain.
A key factor in the decision to buy an investment property is when you’re going to need access to your money, because to do that you will need to sell it. If you’re looking for a 2-3 year investment, property is probably not the strategy for you. However, if you’re prepared to invest your money for 5-10 years, you will have a far better chance of achieving a capital gain and therefore an overall successful property investment.
Know your budget
A good investment should create wealth, not stress. After meeting with your lending specialist, and confirming how much you can afford to spend on an investment property without causing financial strain, it makes sense to talk to your accountant or financial planner to clarify your findings.
When you crunch the numbers, make sure you give yourself some breathing room as you need to take into account possible interest rate increases, or even periods where the property may be vacant. There may also be unforeseen costs associated with owning an investment property (e.g. repairs and maintenance or in the case of strata properties, special levies) that you need to factor into your budget.
Know your criteria
Once you have a budget, you need to do some research to make sure you’re getting the right property, in the right location, for the right price, especially if you’re looking to buy interstate or in an area you don’t know well.
Here are seven important things to consider when evaluating an investment property:
- What are the rental vacancy rates like in that area?
- What is the average weekly rental return for a comparable property?
- Is there public transport nearby?
- Is the property close to schools, shops and other amenities?
- What ongoing costs will there be (e.g. strata levies, council rates)?
- Are there any proposed developments/council approvals in the proximity?
- Is the area reliant on one particular industry, and if so how strong is that industry?
Of course there will be other aspects to consider too as every property is different.
It’s important to keep all your financial goals in mind. It’s easy to get caught up in the excitement of the investment property purchase, but don’t settle for something you’re not 100% sure about.
So is it right for you?
Owning an investment property can be a great way to build long-term wealth. However, it is certainly not for everyone. There are other ways to invest that don’t come with the same level of initial cost or ongoing commitment.
Like all financial decisions, it pays to do your homework and be clear on what you’re hoping to achieve.
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