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A recent survey by Mortgage Choice found that 43 per cent of Gen Ys are intending to buy an investment property ahead of their first home. They’re willing to sacrifice the First Home Owners Grant and stamp duty concessions because they’d rather stay renting where they want to live and suit their lifestyle and buy an investment somewhere affordable.

So let’s take a look at my top tips, mistakes and traps for first-time investors. But first, here’s the overall picture.

I think the key to having a great property investment is outperforming the market in capital growth. Yield is important but the serious windfall comes if you find an area with great growth prospects. This can be achieved by solid research, observation and calculated risk.

Imagine if you’d bought a couple of Paddington terraces in Sydney in the 1970s and held them until today. Yet Paddington then only had potential. Very few ‘astute buyers’ wanted to touch the area. So look around and try to unearth the next Paddington. Personally, I think King Street, Newtown in Sydney is a great example of an area with incredible growth potential, along with its neighbouring suburbs.

Generally, properties within a 10km radius of a major CBD or close to city beaches (also within 10 to 15km of the CBD) will yield the greatest growth. Try to find the areas that are relatively unwanted and have the signs for future growth. In addition to location, look for areas that have access to cultural and recreational facilities (universities, art galleries, historical precincts, grand period homes etc) as well as a growing village environment.

And when all the research and box ticking is done, go with your gut instinct and be prepared to take a calculated risk.

Tips

  • Know exactly how much you can afford and build in a buffer. Get your finance organised before you look and factor in that interest rates might creep a bit higher. Assume a few extra costs in the first few years. If you plan for a few things to go wrong, you’ll be okay if they do.
  • Focus on capital growth above all else. You will make far more money out of a great capital growth investment than you will out of one that has slightly more rental return. Of course, yield can’t be ignored as you’re generally relying on it to fund the loan. The highest yielding properties are those in greatest demand. I recommend two-bedroom properties located within one kilometre of a train station.
  • Register your details on the top real estate websites. You’ll get first notification of new listings and some agencies, including ours, offer registered buyers the opportunity to inspect new properties before they are made publicly available.
  • Buy something that feels good. Many people say don’t buy an investment emotionally but I disagree. If it feels great to you then it will feel great to others in ten years when you decide to sell it.
  • Inspect at least 10 properties before you buy. Even if the first one seems perfect, make sure you see enough to really know the market and recognise a good buy.
  • Change the time you inspect properties. Open for inspections are great because they allow you to see a lot of properties in a short time but make sure you go back and see the property you like at different times of day and also on different days to make sure it presents well at other times.
  • Buy older style houses or apartments for better growth.
  • Take a seven-year view, as most property cycles revolve every seven years so make sure you can stay the distance to get real growth.

Mistakes

  • Overpaying because you haven’t done enough research. Much of your profit can come in the buying if you do it right.
  • Not putting in the effort required. Make looking for your investment a second job, as it will pay more than your first job if you get it right!
  • Buying without emotion – real growth comes when you unearth a hidden gem so buy something that excites you.

Traps

  • Buying brand new. It often looks and feels great, but capital growth can be delayed when you buy into a brand new building. Older properties often have better growth in the first five years.
  • Overextending yourself. If you can hold a property in a good location for seven to eight years, you should be able to realise a substantial profit every time. If you stretch yourself too far and have to sell, you may end up losing money. Make sure you can afford what you’re investing in.
  • Buying with friends. Although it can seem easier to buy the property you want if you go halves with a friend, it can come undone if you have different views or circumstances down the track on the time to sell. If you are forced to sell prematurely or at the wrong time, you may lose much of your gain.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.


Posted by John McGrath – Switzer News on 30th August, 2011