In recent years property investment has received some seriously bad press, perhaps now it is timely to consider property investment and ask whether it deserves the bad publicity and if not, why not?
Property investment on a standard scale is a simple investment that most people can understand. It is when tricky financial manipulations are entered into in order to increase property portfolios that things can come unstuck. That aspect of property investing is an area well left for the experts.
These comments are about property investment that is held for solid capital growth, regular income and tax purposes. Here, we cover some of the terminology that is used, some of the methods and some practicalities.
When you start investigating property investing you will hear the term ‘power of leverage’ used quite frequently. So what is it? Leverage is using borrowed money to buy an appreciating asset or in this case, property. If the value of your property increases above the price you paid – allowing for expenses – then your wealth has increased. This is often referred to as having increased equity in your property.
Leverage is a way to increase your wealth by investing with borrowed funds. You are able to purchase a large item with a deposit (usually around 20%) and the bank or lending institution provides the rest. Property is attractive because it is considered to have more solid leverage than many other types of investments. Lenders will consider financing property because it’s considered less risky. Property is tangible (you can see it and touch it), prices don’t fluctuate on a daily basis, and can be readily valued.
Investors often seek property that they can add value to and it is one of the few investments that you can do so quite easily, not to mention that it can be quite fun. There are two reasons for adding value. You may wish to increase the property value or improve the look of the property to attract higher quality tenants and an increased rental return.
Transforming the value of the property and increasing the rental income can be achieved for very little outlay. Painting always provides an instant impact for little cost. There are some great flat pack kitchens out there or if the cupboards are sound give the kitchen a freshen up with new doors, or paint the doors and purchase new handles. Pave an area for a BBQ or outdoor seating, tidy the garden, lift the carpets and polish the floorboards. There are literally hundreds of ways to improve the look of a property to make it more appealing to a tenant or prospective homeowner. With a little effort, some know-how and some savvy investing you can increase the return on your property quite easily.
Increasing your wealth or accessing your profits
While you may choose to sell your investment property to gain access to the profits, you don’t necessarily have to sell your property. Another option is to refinance by obtaining a new valuation of the property that shows the value has increased. You can then borrow more funds using the increased value or equity as security.
Property can offer tax advantages through negative gearing, which allows you to offset any losses against your other income. Taxation is an area where specialised assistance should be sought. The money spent on obtaining an accountants’ or taxation agents’ advice and knowledge should be more than recouped in any tax savings that they save you.
Investing in property is like any other investment. Care should be taken, experts consulted and investors should definitely conduct their own research. Outlined below are some suggestions of areas that you may want to instigate or educate yourself in so that you are able to make an informed decision when deciding to invest or not.
1. Education. Educate yourself on investment property. Borrow books from the library, attend seminars, and speak to experts. Always try to gain advice from people that don’t have a vested interest in any property transaction that you may be considering.
2. Goal setting. If you don’t have a clearly defined goal of what it is you want to achieve how will you get there? Work out what you want to achieve and then work out a plan to get there remembering to factor in planning for unforeseen events.
3. Resources. Construct or establish a solid resource base. This can include experts such as lawyers, accountants, real estate agents, builders, plumbers etc. By establishing long term relationships with these people you can build a base that you can trust. You will find that if you build relationships and establish mutual respect this will become one of your most valued resources.
4. Due diligence. Before investing in any real estate your due diligence is essential. Know your market, know your prices, know your neighbourhood and likely rentals. Don’t be rushed and ensure that you carry out your homework thoroughly.
5. Property Management. A good property manager can make your investment. A bad one can break it. Don’t be the investor that goes for the lowest priced property manager. Interview the property manager and have some questions prepared before you go. Ask for references.
Well located, actively managed investment property can be one of the best investments for everyday investors. Fisk and Nagle First Choice offer this information for general purposes only. It is not intended as investment advice and Fisk and Nagle strongly recommend that independent advice be sought before committing to any investment.