Property investment for beginners can seem quite daunting.
The good thing is that you’ve already conquered the first step: deciding to climb the property ladder and create wealth!
Now the next step is equipping yourself with as much knowledge as possible before you buy a property.
To ease any pressure that you may be feeling and to answer any questions you may have; we have put together this essential guide to property investment for beginners.
While there is no ‘one size fits all’ approach when it comes to real estate investment, applying these tips can help smooth out the road to owning your first property investment.
So, Where Do You Start?
A good place to start with property investing is to analyse your current financial situation and set your future financial goals. Setting your future financial goals involves identifying a property investment strategy that aligns with those goals.
Determine Your Affordability
You’ll need to set up your budget to determine whether you’re able to balance your cash flow, income and expenses.
Generally, real estate investors need to pay a minimum of 5-10% deposit when buying property, so you’ll need to calculate whether you can afford to pay at least that.
You should also take note that a lender will typically require you to pay lenders mortgage insurance (LMI) if your deposit is less than 20% of the total value of your property. In other words, you’re borrowing more than 80% from the bank to buy your real estate.
Saving up a greater deposit means you’ll save on having to fork out the cost for LMI. But remember, each property investor’s situation is unique, so you should make decisions based on what’s best for you.
Then you’ll need to ensure that you can afford to pay your mortgage repayments in the long-term.
Other expenses you will need to take into account include:
- Stamp Duty;
- Capital Gains Tax (you’ll definitely want to consider the six-year rule to avoid CGT);
- property valuation and quantity surveyor fees;
- legal fees; and among other things,
- land tax
Decide on Your Property Investment Strategy and See It Through
Many experienced investors recommend sticking to your investment strategy to avoid getting roped into schemes that promise to create your wealth quickly.
Rather, decide on the strategy that works for you and see it through.
Deciding on the best strategies for you can be a daunting task, especially if you’re a first-time property investor. But if you can find a strategy that best aligns with your goals and if you can stick to it, then you’ll reduce the risk of losing substantial wealth.
Briefly, here are some of Australia’s most popular investment strategies:
- Buy and Hold: the buy and hold strategy involves purchasing a property with the ultimate goal of holding onto it long enough to generate capital growth
- Negative Gearing: negative gearing occurs when you borrow money to invest in property and the income you make from it, through rent, for example, is less than your expenses. So, you’re running at a loss
The good news, however, is that the Australian Tax Office (ATO) allows property investors to deduct any losses they make on their investment property from their taxable income.
Many investors whose objective is long term capital growth, don’t expect to make their money from rent. So, while they wait to realise that growth, their taxable income can be reduced and the rent can contribute to paying some of the property’s expenses.
- Renovate and Hold: the objective of renovating and holding your investment property is maximising your property’s earning potential
- Flipping: instead of waiting years to see a profit, some property investors search for old, broken-down properties to renovate to increase the sale value
- Rentvesting: the rentvesting strategy involves purchasing an investment property in an area that suits your budget, generally outside of the city. At the same time, you rent a property in an area that fits your lifestyle
To learn more about each investment strategy, make sure you check out the six property investment strategies every investor should know.
Meet With a Mortgage Broker
Once you’ve decided on an investment strategy, and before you even start looking at properties, the next step for property investment beginners is to meet with a mortgage broker.
A mortgage broker will give you an idea of how much you can borrow to buy an investment property.
What’s more, is that taking out a home loan is a significant commitment, so you’ll want to consult with a mortgage broker to help improve your chances of having your application approved.
For example, they might advise you first to settle some of your other financial obligations to improve your credibility. Along with the financial advice, mortgage brokers can help polish your application to make sure it’s accurate.
Surround Yourself With Experienced Professionals
Surrounding yourself with professionals who have experience and expertise in the property investment journey will add significant value to you.
While there’s no doubt that you’ll need to consult with various property professionals such as accountants, conveyancers, real estate agents and quantity surveyors, it’s also crucial that you engage with like-minded individuals – especially those who have already started their investment property and know a thing or two from their experience.
More often than not, avid property investors will jump at the opportunity to help pave the property investment road for beginners. And with social media platforms, it’s never been easier to connect and engage.
Subscribing to podcasts, attending seminars and gaining knowledge from blogs will undoubtedly boost your property investment peer network.
For example, the Property Blueprint Podcast aims to educate its listeners by helping them achieve financial independence with their property investment portfolio.
Factors To Take Into Account When Finding Your Property
Another property investment for beginners tip that we can give you is: make sure you base your buying decision on research and data, not emotion.
Remember that you are buying an investment property to create wealth, so avoid basing your decision on emotion and focus on the logic.
Research and data you should focus your attention on include:
- Location: what’s the population like in that suburb? Is it growing or declining? Is the property in an area where you are likely to get tenants and experience property price growth?
- Infrastructure: what’s the area’s infrastructure like? Are there good schools, hospitals, restaurants, shopping malls and public transport in the area? Your property is likely to be far more attractive to potential tenants in areas with a strong infrastructure.
- Demographics: is the property suited for the majority of tenants in the area? What are the economics in the area? Is the suburb primarily catering middle-income families? Or is the area attractive to well-off young, single individuals? Suppose the suburb is close to a university. If that is the case, then your tenant demographic will be students looking for a low-maintenance property.
- Potential to add value: if your investment strategy involves renovating and holding, is property development an option to add value to the property through those renovations?
Take Advantage of ALL Your Tax Deductions
Did you know that the Australian Tax Office (ATO) offers property investors significant tax deductions on their investment property?
Property investment for beginners 101: take advantage of these tax deductions!
Seeing the full potential of all the tax breaks available to you could be the difference between you hoping to earn enough money from your investment property and having positive cash flow.
You can claim tax deductions on:
- interest on your loan;
- rental agent fees;
- property manager fees;
- legal expenses;
- quantity surveyor fees;
- council rates;
- Insurance; and, among other things,
- repairs and maintenance
Make sure to read our ultimate guide on investment property tax deductions so that you are maximising your investment property deductions.
One of the most significant tax deductions you can claim is on the depreciation of your property and its fixtures and fittings.
Around 70% of property investors in Australia don’t buy a tax depreciation schedule.
A depreciation schedule is a report that details the tax depreciation deductions you can claim on your property. So many investors miss out on the opportunity to save thousands of dollars each year because they don’t take advantage of the benefits of obtaining a depreciation schedule.
To learn more about the importance of ordering a depreciation schedule when buying an investment property, make sure to read our essential guide on depreciation schedules.
Two of the most significant property investment tips for beginners that you should take away from this article is:
- make sure that the property you’re buying and the strategy you’re utilising aligns with your current financial circumstances and your future financial objectives; and
- take advantage of all the tax deductions available to you – especially depreciation
Beyond that, it’s essential that you surround yourself with an experienced team of professionals who will help you achieve all your property investment goals.
As an avid team of property investors ourselves, we at Duo Tax, are always helping beginners (and even expert investors) take advantage of the second largest tax deduction you can claim: depreciation.
Our mission is to help reduce the burden by providing the most affordable, convenient and aggressive tax depreciation schedule service so that you can maximise the return on your investment.
To see how our quantity surveyors can help you, get in touch today.