If you want to make top dollar off an investment property, then you’ll have to make it work for you – with paying attention to details being the key.
Most of us aspire to own at least one investment property. But managing bricks and mortar assets isn’t easy. If you want to get the inside track on property investing, you need to do your homework.
Investors who make money, regardless of the prevailing market conditions, pay attention to detail, even when they seek out expert advice. It’s vital to cover every base to deal with the ups and downs of the market.
A poorly-located apartment or house is an investor’s worst nightmare. Avoid secondary locations and streets that have a lot of commercial activity. It’s also smart to be close to public transport, restaurants and schools, but preferably in a quiet spot. Veteran estate agent Bill Cook, of Williams Batters, says one of his golden rules is “don’t buy on main roads but be close to main roads”. This is sound advice: busy roads give quick access to transport and amenities. Investment properties also should appeal to owner-occupier buyers, not just to other investors.
Profits and tax
Australian house prices have grown by an average 11.5 per cent a year since 1926, according to AMP Capital Investors. Unlike other countries, Australia’s tax rules positively advantage property investors. To be able to claim deductions through negative gearing for the losses incurred on a property is a major reason why 10 per cent of taxpayers own one or more income-producing residences. Be careful, though. Negative gearing delivers the greatest tax breaks to high income earners and is of little benefit to those earning less than $80,000 a year.
Is it best to buy property that can be expected to deliver a solid capital gain over the long-term or acquire a “cash-flow positive” dwelling that generates high rents but lacklustre capital growth? Property adviser Paul Osborne, from Secret Agent, says those who chase capital growth “always make a forward estimate, so in many ways you are speculating about what is going to happen down the track”. Even so, most investors focus on properties that offer sound prospects for capital growth; they see this as the best way to build equity and achieve financial independence.
Think like a tenant
What are tenants looking for? Martine Bannister, who manages rental properties in Melbourne’s north for Jellis Craig, says most tenants expect a dishwasher and airconditioning. They will also pay more for places with new kitchens and bathrooms. “People want the mod cons these days and you lessen your vacancy periods if you have them,” Bannister says. Security features and open floor plans attract tenants, too. The ideal layout for a rental property is one in which the bathroom or lounge-room is sited between the bedrooms. This maximises privacy and is valued by tenants who share.
Getting the benefit
Tax breaks shouldn’t be the be-all and end-all of your investment approach, but once you’ve bought a property try to get every deduction you’re entitled to. The normal deductible expenses of interest, management fees, repairs, insurance and council rates are top-of-mind for many investors, but other allowable expenses can be missed. These include claims for land tax, depreciation and borrowing expenses, such as loan set-up fees, rate lock-in fees and stamp duty on a mortgage.
Hang on to all paperwork. If you buy an established apartment or house, the vendor may not pass on the property’s depreciation report, if one exists. You can fix the problem by hiring a quantity surveyor to produce a new report on the outstanding depreciation. Claims can be made for depreciating the building structure of newer apartments as well as for replacement bathrooms and kitchens, heating and hot water systems, even the curtains.
Before you look for an investment property to buy, run a check on your finances and estimate what could happen if an investment goes pear-shaped.
Your list of worst-case scenarios shouldn’t be limited to external factors such as the impact of a fall in property values or an increase in borrowing costs. Consider your personal circumstances, too. What will happen if you lose your job? Will you be able to service a large debt if you move from being a two-income household to a single-income one?
Once you’ve determined how much you’re prepared to borrow, you should build in buffers. It’s smart thinking to project that interest rates will go up by 3 per cent. Always assume there will be added costs, such as your property being without a tenant and income for a six-week period. If you plan for these wildcards, you’ll cope a lot better if they do eventuate.
Case study: Dad’s advice proves a valuable investment
When 19-year-old Lara Stephens bought a rundown single-fronted cottage in Hamilton Street, Seddon, in partnership with her father, Craig, last November, she was doing what many young people do.
Buying an investment property, rather than a home to live in, has become an accepted way for young Australians to get a foothold on the property ladder.
In Lara’s case, it helped that her dad is a fourth-generation estate agent, with plenty of property experience.
Craig Stephens, of Jas Stephens, bought the two-bedroom house for $600,000 through another agent at a State Trustees auction. Lara, who is study marketing at RMIT University, has since co-ordinated a modest renovation of the property, which has just been offered to the rental market for $450 a week.
The bathroom and kitchen will eventually need major work and the house will need restumping, Craig Stephens says.
“But a cosmetic renovation to the tune of $30,000 through Bunnings and Ikea allowed us to clean it up and rent it out.”
New pendant lights were bought from the Swedish homewares giant, and the cottage has new carpets and fresh paint throughout.
Lara is learning how to handle a mortgage, her father says. “I’m teaching her how to renovate and source various materials and introducing her to various tradespeople.”