Property investing, much like the share market, goes through a series of ups and downs every couple of years. It goes from a no-go area to that of a hot tip that people are desperate to lunge into.
Though assuming you don’t buy into the hot tip approach and are still interested in what investment properties can do for your overall wealth, there are numerous considerations that you must look at before jumping on the band wagon.
Here are some of the basics you need to look at when it comes to investing in property (however, don't forget to get financial advice regarding your particular circumstances).
What are the initial costs?
Beyond the capital required to purchase the actual property, the two main upfront initial costs are that of stamp duty and conveyancing fees (legal fees) for obtaining the property.
Often people absorb these costs within the amount they borrow, meaning the legal fees and stamp duty is effectively added to your home loan. What you need to remember is that by doing this, you will effectively pay larger amounts of interest and increase the cost of these services by paying them off over the long run.
Some people instead look to fund these out of their own pocket and avoid the debt. You also need to consider what aspects of the property require fixing in order to legally be able to rent it out. Look to engage a tradesperson you are familiar with or have heard great reviews about – you can look to them to be the ongoing ‘go to’ person for future work that your tenants request.
What are the ongoing costs?
Ongoing costs beyond repaying the investment loan can vary. Some of the main items you need to factor into your budget include insurance for both the property itself and that of protecting yourself as a landlord (landlord insurance).
You will also be expected to pay council rates on a quarterly or yearly basis in most states along with any strata or body corporate fees for those in apartments or townhouses.
You are also required in some states and/or properties to cover the cost of water.
Another factor I personally forgot was that of the fees associated with paying a real estate agent to manage. They will often charge a percentage of your total rental takings – for instance it could be between 3-7% of the money collected on any given month.
Are you prepared for ‘out of the blue’ costs?
Another important consideration to have in mind is that of costs that might sneak up on you. For instance, if the water heater were to somehow implode overnight, you as the landlord would be liable to fix the problem and replace the heater.
If the drains or plumbing backs up, you as the landlord will also be expected to fix at your expense. Basically anything that is related to the property and its ability to provide a liveable experience for your tenant is your responsibility financially.
More: Top 10 mistakes of new landlords
Be sure to set aside money on a regular basis to cover yourself for these out of the blue expenses. Insurance in many cases doesn’t cover the majority of minor/major issues that a property will face regularly.
Is your rate of return guaranteed?
In most cases you cannot guarantee a specific rate of return. Beyond some of the Government backed investment property schemes, the rental return is dependent upon what the market is willing to pay. This means the demand of the rental market will dictate the sort of money people will be willing to pay.
More: Buy investments with owner occupiers in mind
This means that your rate of return could fluctuate, so it is wise to seek financial advice on whether or not the return will meet you income needs if used solely as an investment property.
Have you investigated the tax benefits in full?
This is my favourite. Be sure to seek financial and accounting advice from professionals that can help you understand the concept of ‘negative gearing’. Basically just a fancy way of saying you are making a loss, this little benefit will allow you to reduce your taxable income each year by any losses the property makes.
In many cases there will always be a loss, as things like the mortgage interest on your investment property are tax deductable. Look to speak with your accountant about maximising all angles of depreciation and negative gearing – the more you do upfront to understand what is deductable, the greater the potential losses will be and in turn the reduction in your taxable income.
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Alex Wilson is the founder and editor of Savings Guide, Australia’s number one saving money website. For regular money saving tips, visit Savings Guide or follow Savings Guide on Facebook.