Property investment is a popular wealth creation strategy in Australia, and it’s easy to see why. Houses and apartments can be easier to understand than the share market, not to mention less volatile, and a shortage of stock can guarantee a steady capital gains trajectory.
Before you take the plunge into property investing, however, you should ensure you are ready for it.
Make sure you can afford it
At least at the beginning, the rental income is unlikely to cover the mortgage repayments and other expenses that are part and parcel of maintaining a property, such as council and water rates. And like any property purchase, you will have to pay stamp duty, conveyance fees, legal charges, search fees, and pest and building reports.
In other words, your investment will be costing you money. Therefore before you buy an investment property, you must ensure you have enough cash flow to cover these expenses.
Financial adviser Greg Pride of Centric Wealth suggests working out if you are ready to buy an investment property by deducting your current expenses from you income. This will give you your savings capacity.
“If you don’t have a savings capacity, there’s no point getting started because you won’t be able to fund it,” Pride says.
Be prepared for stumbling blocks
One of the pitfalls of property investment is that there may be periods when you don’t have tenants and will have to cover the costs without the added benefit of rental income. Again, cash flow is important – ensure you have enough accessible cash to cover such down times.
And just because interest rates are currently at historical lows, it doesn’t mean they won’t rise again. When calculating whether you can afford the repayments on an investment, consider what you would have to pay at a higher interest rate, such as 8%.
Do your homework
Don’t assume that any property in any location will increase in price or provide strong rental returns. If you are not willing to research different areas and their rents and vacancy rates, then you are not ready to buy an investment property.
Well-located properties, close to amenities and desirable neighbourhoods, will increase in value. “But there are areas where you can lose money,” says property investment expert Michael Yardney, CEO of Metropole Property Strategists. “For example at Docklands in Melbourne, property prices have probably not increased in value at all in 10 years because of an oversupply.”
Be in it for the long haul
From having an adequate deposit to maintenance costs, property has high entry costs so the best way to reap the rewards is to adopt a long-term strategy.
According to Yardney, in every 10-year cycle there will be a couple of years of exceptional price growth and an equivalent period of price drops or stagnation. To come out on top, you should be prepared to hang onto your investment property for 10 years or more.