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How to minimise risk when buying an investment property

How to minimise risk when buying an investment property

With the property market across the country remaining strong and rental prices in metropolitan areas rising steadily, becoming a property investor is an increasingly attractive option for many Australians.

Like any investment, however, buying an investment property entails risk. If you are contemplating acquiring another home loan to finance the purchase of an investment property, here are some tips to minimise the risk.

Think long term
“You always have to buy a property thinking you’ll hold on to it for eight to 10 years. If you don’t want to do that, trading shares might be a better investment for you,” says Toby Primrose, director of Australian Property Investor, a company that helps investors manage their property portfolios.

Once you factor in taxes, legal fees and other costs associated with selling, you will be slugged with a bill of approximately $30,000 on a $400,000 property, according to Primrose. If you plan to sell too soon after you buy, you may even lose money on the sale once you subtract these costs.

Property prices have historically risen in Australia, but it doesn’t happen overnight. As Primrose writes on his company website: “The only question you need to ask as an investor is how long I will have to wait to double my money; the answer is usually seven to nine years.”

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Do your homework

Buying a property is an expensive enterprise, therefore doing your homework is crucial. Research capital growth trends, rental yields and vacancy rates in your chosen suburbs to ensure you are buying in the best possible ­– and least risky – area. Apply the same diligence in researching and comparing home loans to get the most suitable option for your needs, factoring in other financial commitments.

Don’t be seduced by the ‘flipping’ phenomenon
Spurred on by TV programs such as Flip This House, a growing number of people think they can buy a run-down or off-the-plan property and sell it quickly for a tidy profit. That’s one of the riskiest things a property investor can do, says Primrose, and he warns his clients against it – particularly when it comes to buying off the plan. “It takes five to seven years just to break even when you buy off the plan,” he says.

Primrose says the most effective way to minimise risk is to avoid trying to identify the next hot spot or “reading” the market. Even the experts can get it wrong.

Once you buy, be smart
One of the biggest concerns of any property investor is the risk of not being able to rent their property easily and enduring periods of no rental income. “There are two reasons why a property remains vacant,” says Primrose. “It’s either in a state of disrepair and therefore unattractive to tenants, or the rent is too expensive.”

His advice? Be diligent about the property’s upkeep and do your homework on the going rental rates in your area. Don’t rely on the seller’s estimates of what rent the property may fetch.

If you are buying an apartment, look at what other apartments in the block are commanding in rent, Primrose advises. For houses, check rental rates with local real estate agents or look online.

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