With borrowing costs lower than they've been for decades, property investment has become increasingly popular as a method of building wealth. But how does a complete investment novice take advantage of low interest rates and get started on the property ladder? There are no hard and fast property investment rules to follow, no written guidelines and no easy fix! In this article we take a look at the fundamentals of property investment and provide some information you might need to know before you get started.
How do you make money from property investment? There are generally two ways to make money from property investment – rental income and capital growth. You may also enjoy some tax benefits that help you to maximise your profits and the effects of rental income and capital growth.
Rental income from an investment property helps you to pay down your mortgage and increase the equity you have in your property over time. If the rental income is greater than the costs involved with your rental property, this is referred to as ‘cash flow positive'. If the rental income is less than the costs involved with your rental property, this is often referred to as ‘negative gearing' and may offer some tax benefits. Both strategies may be useful to you, depending on your personal financial situation.
When your property increases in value, this is referred to as ‘capital growth'. Generally speaking, the longer you hold your property the more opportunity it has to increase in value. When you add in the effects of rental income paying down your mortgage, your equity in the property grows over time and you can see significant gains. The equity is your profit. Many investors access the equity after it builds up to use as a deposit to purchase their second investment property, and then a third and so on until they have a property portfolio.
What are the steps to getting started? 1. Seek independent financial advice 2. Gather your deposit 3. Structure your finances 4. Source a property 5. Manage and grow
Our team is here to guide you through these steps and put you in touch with the right professionals to help to make the process easy and straightforward.
Seek independent financial advice to determine your financial position. You'll also want to explore the tax benefits of investing and how it will help to offset your costs, so it pays to get advice from professionals like a financial planner or qualified tax accountant.
Saving for a deposit is probably the most significant hurdle when it comes to property investment. If you already own a home, you could access the equity to use as a deposit on your first investment property. If you don't, then then you will need to use genuine savings. How much money you actually need for a deposit depends on the cost of the property you wish to purchase – but in some cases, it might be possible to start your property portfolio with as little as 5% of the purchase price.
Structuring your finances is the next important step. Our job is to find and help you access the best possible loan for your purposes considering your personal financial situation. We help you to sort out exactly what you can afford to pay for your first investment property, and help you to find the loan that will be flexible enough to meet both your current needs and your future investment plans. Structuring your finances is a very important step and it's wise to get your finances sorted before you even start looking around for a property to buy.
Source a property with capital growth potential. Capital growth is where you aim to make the most significant profit from your investment property, so it's important that you take the time to consider how this will happen and do your research. It's a good idea to choose a property in a growth area – inner city suburbs are popular because they are always in high demand. Make sure that the property is near to amenities such as public transport, shopping centres, schools and parks. You can also plan to create capital growth by improving or renovating a property – but be careful to choose a property that only needs cosmetic changes as structural work can be expensive and may cause you to over capitalise.
Remember, you don't have to choose an investment property that is close to where you live. You can invest anywhere in Australia and some areas of the country have more capital growth potential than others.
Manage and grow, so you can build equity and use it to purchase your next property. Two things are important to your objectives here – keeping your property tenanted to pay the mortgage and keeping it well maintained to protect the value and grow your equity. If you are time poor, you may want to employ a property management company to help keep your property tenanted and maintained. If this is the case, make sure you take the costs into consideration when you are structuring your finances.
After you have held the property for a while, you can check on capital growth by having your property valued. When you have built significant equity, you can use it to purchase your next investment property. The more properties you hold, the more quickly your equity builds and the more properties you can purchase – and up the property ladder you go!
Understand the value of professional advisers Part of our service is to refer you to the right people at every step of the process – from a good buyer's agent if you don't have time to source properties that meet your financial and investment strategy, to the professionals you need to complete the purchase. We can help with referrals to solicitors, conveyancers, building and pest inspectors and even property management companies after you make the purchase.
It all starts with a conversation about your financial situation. So why not give us a call today? If you're already investing and have friends who might benefit from property investment, don't hesitate to send them to us. With the cost of borrowing so low, it's a great time to put your foot on the first rung of the property ladder!