Last Modified: September, 27th 2016
The very thought of purchasing a property for investment is enough to make the blood run cold, but given the right advice the whole process need not be so daunting. So relax, get a nice beverage and over the next few minutes we will begin to demystify the entire process.
The first rule when considering a real estate deal from an investors perspective, is to remain calm and never allow your emotions to get involved in the decision making process. The ability to negotiate in many situations is limited, especially if you are considering buying a property off the plan (highly recommended btw), so unlike a normal residential purchase you need to keep in mind your scope for getting a bargain, is limited to the overal deal itself. I will explain further down. Make sure you brief your agent or real estate negotiator with your aims and expectations.
So Why Buy Property Off The Plan?
The basic premise behind purchasing investment property off the plan, is you are buying at a discount, when compared to the cost of existing properties. Because you are investing in the future value also, along with this are risks, you are compensated by a lower price than a completed property. When considering the areas of where to be looking, there is a checklist of sorts that will determine if you are on a potential winner or not. Is the property located close to transport, schools, shops, universities, cinema, parks and recreational reserves? Properties that are in sought after locations are there in that position for very good reasons. It is no good buying a property that is priced right but no one wants to rent.
This brings us to the topic of vacancy rates. You can check on this by consulting real estate agents in the areas you looking to purchase. A low vacancy rate means that on average you will be without a tenant for your investment property for a lot less of the year, than if you buy a property in an area with less demand and a higher vacancy rate. Another thing to consider is the time of year or season, when check vacancy rates. Areas that are highly populated in summertime, due to be close to beaches and swimming facilities, may not see such success in the winter months. For this reason, you need to keep in mind the time of year you do your due diligence or market research. Don’t just do this from a 50 thousand foot view either, make sure you visit the areas in focus to see for yourself what the facilities are like, especially the schools when it comes to the quality of education, you don’t want to be assuming the school is good if you notice that the walls are covered with graffiti or look run down. The same goes for the shopping centres, make sure they are well equipped with everything a potential tenant may be looking for.
Buying An Investment Property Is Different To Buying A Home
Another great tip when it comes to your property research is flexibility. There is no point in getting so tightly focused on a particular style of property if it is going to limit your chances of finding something suitable. Remember, you are not buying a home for yourself but for someone else, which means you need to keep all emotions out of the equation. What you might find is the ideal investment property in the ideal neighborhood is one that is outside of your financial budget, so don’t fall in love with it, just accept it and move on to the next one on your list. It is a good idea to never let the seller know just how much you love it or have to have it, as this can cause you to do a worse deal than if you kept your poker face throughout the inspections.
Having a flexible budget is also good advice, as unexpected expenses may crop up. For this reason, it is best to factor this in when setting your budget based on what you are able to borrow, minus the additional costs that come out of nowhere. Some of the final costs that may undo your plans could be found in additional taxes or levies, so make sure you do your homework well.
Do You Need Mortgage Insurance?
One thing you need to be on top of is mortgage loan requirements when buying an investment property. Are there things such as mortgage insurance applicable based on the LVR or loan to value ratio? In the case where you are financing over a certain ratio, some lending institutions require what is called mortgage insurace. This can add significantly to your loan repayments, so may sure you get good advice from your financial adviser before you commit to what is comfortable from a repayment point of view. Serviceability is crucial when all the factors are involved, such as levies and bonds, vacancy rates, land tax and council rates. Setting up a spreadsheet with all such costs and a range of variable scenarios is a wise thing to do. You always want to make sure you are covered in the case of things turning out differently to what you had planned.
Right now in the Australian real estate market, property values are high and should remain this way as long as government fiscal policy is calling the shots. Due to the lack of supply and high demand, quality properties in the right location are going to remain strong prospects for years to come. No market is free from market corrections from time to time and many would argue that real estate is over priced in some of the hot regions such as Sydney, Melbourne and Brisbane. But to the defense of the federal reserve and to the delight of investors in the short term, prices are still set to rise over the next year or two. This presents the perfect opportunity for those who are ready to move on a good real estate deal when they see one.
Properties Rise By 15% – Historical Precedent
With properties rising by as much as 15% in some regions over the past 12 months of 2014, and expectations that the following year could see similar gains to at least 10%, it would be advised that for a short term goal of investing $100k to make $10k profit in 12 months time, would a good investment. But with all things property, there are costs in both buying and selling, so this simple equation needs to be fleshed out properly to get the full effect of such price movements. And as they say, there are no sure things and you can always get burnt. Real estate can be fickle and just like any market can rise and fall based on external influences. We have only to look at the effects of the GFC on the US, Japanese and European markets to learn a valuable lesson. In some of these cases, property values fell by up to 60%. Something to keep you level headed when planning out scenarios for property investment profits.