7 Golden Rules of Investing in Property
Many property investors buy an investment property in the hopes of building wealth for their future. However, there are plenty of horror stories out there about property investments gone wrong.
Fortunately there are some simple rules for property investing that could help you avoid mistakes and make it easier to reach the financial goals you hope to achieve.
#1: Know your investment goals
Before you begin investing, it’s a good idea to have an idea about what you hope to achieve. Some property investors focus primarily on the prospect of future capital gains, while others are more concerned with rental income and cash flow. There are also property investors who use a combination of both strategies to help them achieve their long-term financial goals.
Be sure you understand your own goals and what you want to achieve. You’ll be in a much stronger position to choose the right properties to suit your portfolio.
#2: Create a strategy
Once you understand what you hope to achieve by investing in property you’re able to create a strategy designed to get you there. A smart investor will take the time to consider how each aspect of owning a rental property will contribute towards the overall strategy.
Your strategy might include using a combination of different property types in various locations to help spread your risk. You might prefer to negatively gear a property for its strong capital growth potential and keep another property positively geared to help offset the costs of the negative one.
Your strategy should be tailored to suit your individual financial needs. Know what you want to achieve at your end goal and then build your strategy according to what works for you.
#3: Do the calculations
Maths might not have been your favourite subject in school, but if you hope to become a successful property investor, you will need to understand the numbers associated with buying a rental property. You might already know your purchase price and the amount of rent you intend to charge your tenants. However, have you considered how much you’ll pay for council rates, water rates, landlord’s insurance, and property management fees? Have you also factored into your calculations any tax implications of being a landlord? How about understanding how various fees and charges associated with buying or selling your property could impact capital gains if you decide to sell. Take the time to do your calculations before you leap in feet first and know how your investment might impact your finances and your goals. It’s your financial future, after all.
#4: Buy with your head – not with your heart
Buying an investment property is not the same as buying your own home. When you purchase a family home, you’re buying with emotion. You’re focused on how the home will suit your family needs moving into the future.
However, buying an investment property should be all about how the numbers stack up to meet your financial goals. Your investment mortgage repayments and rental income will factor into your decision, as will the potential for capital growth over time.
Rental demand and local vacancy rates may also play a part in your decision. Some people may also buy a rental after considering the potential tax advantages that property has to offer. Remember, it’s an investment so it should make sense financially – not emotionally.
#5: Protect your wealth
Many investors are so focused on building their wealth that they overlook the importance of protecting what they’ve already built. No matter how stable and secure your financial situation might be right now, the unexpected can wreak havoc with your plans.
If you were to lose your ability to earn income due to an accident or serious illness, would you be able to ride out the financial storm? If your tenants stopped paying rent and then left the property in a shambles, would you be able to cover the repayments until the home was fixed up and new tenants moved in?
The only real way to protect yourself financially against unforeseen events is to ensure you have the right insurances in place. Landlord’s insurance can help protect your rental income, while income protection insurance covers you in the event of losing your ability to earn income through accident or illness.
#6: Be wary where you get your advice
If you mention that you’re thinking of investing in property, you’ll suddenly find a variety of well-meaning friends and family members only too willing to offer their two cents’ worth of free advice. Some will immediately warn you against buying in certain areas or certain times of the market. Others will be happy to tell you that some types of properties are better than others.
While those people might sincerely want to help you, it’s important to be wary about the advice you choose to take. After all, your financial situation isn’t the same as theirs. Your income and expenses are different. Your financial goals are different.
Even your appetite for risk is different. So why would following the same things they would do work for your individual situation? Those well-intentioned friends and family might think they’re helping, but unless they have a successful investment portfolio of their own it might be wise to take their comments with a pinch of salt.
#7: Build a strong advisory team
Having a strong team of people and advisers around you can help reduce your risk, increase your knowledge and provide you with ideas for expanding your investment portfolio over time.
Discuss your investment plans with a tax-savvy accountant. Talk to a mortgage broker or finance consultant about your options for the right investment loan. Find the right property management agency to look after your investment. Make an appointment with an independent property investment strategist.
Your team of professional advisors can help you achieve your financial and investing goals.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.