Although investing in property is a great way to earn passive income and grow your net worth, the complexities of property investment intimidate many prospective investors, locking them out of this relatively stable and lucrative investment option.
Property investing, while less risky than other investment options like shares, does carry a significant degree of risk which necessitates one to be informed and careful when taking on this venture. It’s prudent that you evaluate the risk/benefit profile of property investing to ensure you know what to expect when putting your money into the sector.
Consider the benefits vs risks of property investment
Here are the benefits a property investor should expect:
- A general increase in prices. History shows that property prices fluctuate in cycles but always generally go up overtime.
- Rent income. The rent you get from your property can provide a consistent and stable additional income.
- Tax advantages. Property investing gives you access to certain tax advantages that increase your returns, such as depreciation.
The risks associated with property investment are:
- Less liquid form of investment. Property takes time to sell – unlike something like a stock or bond, which means you’ll have to wait longer if you want to cash out.
- Your mortgage rises with interest rates. Although interest rates are generally constant in a stable economy, increases will cause your mortgage repayments to increase as well.
- Susceptibility to market forces. While more resilient than most investment options, property investing is still sensitive to market factors which could influence supply, demand and the ultimate value of your asset.
While the risks are far outweighed by the benefits, it’s important to take a sober approach and to consult professionals – including an accountant – to determine whether your cashflow can sustain such a venture.
Do your research and strategise
Information is power; the more you have, the better your chance of making a good return from your investment. Resources such as the Australian Bureau of Statistics and other property-market websites can be used to gather data and insights that you can rely on when planning your investment strategy.
Once you have enough information, you’ll need to formulate your investment strategy i.e. how are you going to make a profit from your property investment?
They’re 2 popular methods of generating returns from property investing. These are:
- Buying to resell. In this strategy, you buy property, hold it while its value appreciates, and then you sell it for a profit. Rental income can be used in the meanwhile to cater for mortgage repayments and other bills while the property awaits sale.
- Flipping. This strategy involves buying a run-down or mismanaged property, fixing it up, and then selling it for a profit.
Either strategy is capable of producing worthwhile returns, your pick will depend on your knowledge and skills as well as the level of involvement you’re willing to accept.
Find the right property and buy
Once you’ve laid down your strategy, the next thing you need to do is find a property that matches the investment plan you’ve made, attracts tenants, and will keep its value. It’s important that you shop around and look for good prices, and to ensure that the property is inspected by professionals to ensure that you’re aware of the entire situation before you commit.
Some of the professionals who should be involved in your property purchase process include: accountant, financial planner, property expert, conveyancer, mortgage broker, surveyor, structural and pest inspectors.
After you find the property that meets your selection criteria, then you can go ahead – with the involvement of professional help – and buy the property.
While some investors buy cash, most people will use credit to invest through a mortgage. Here are a few tips for mortgage property investment:
- Find out your credit limit. Even before you start shopping around for properties, it’s important to first find out how much funding is available to you as well as how much you can afford to borrow.
- Compare prices. Shop around to find the most competitive interest rates and get pre-approvals where possible to help you compare the prices between different lenders.
Keep your risks low
It’s important to keep your risks at a minimum to ensure you get a return on your investment and reduce or mitigate your exposure if things should not go as planned. Here are some steps to take:
- Keep a cash buffer. In most business ventures, it’s common to encounter unforeseen expenses. It’s therefore wise to keep some cash at hand to cater for such issues.
- Fixed or split mortgage rates. Interest rates on your mortgage sometimes fluctuate which could affect your repayments. If possible, find a lender who offers split or fixed mortgage rates as this provides better predictability.
- Diversify. To reduce your exposure in the market, it’s a good idea to spread out your money by investing in other options or types of properties.
- Do your research. Make sure to gather adequate information before making property investments to find out the risks and opportunities, and to limit your exposure.
Ashley Bryan is an Internet Strategist based in Queensland, Australia. He actively writes on topics of personal interest or for businesses across Australia and New Zealand. View his websites: https://ashleybryan.com.au/ and https://www.websitestrategies.com.au