5 Steps to Determine if Property Investing Is the Right Choice for You
Property investing is often recommended to people who want to make smart moves with their money. When you do it correctly, you get a long-term income stream, tax benefits, and valuable equity. Even if you take a loss on renting the property, you can still use negative gearing to your advantage if the property is increasing in value.
Unfortunately, these benefits can also cloud the reality of what property investing actually is. The market can take some odd twists and turns, and there’s a lot to keep in mind before you get started. If you’re not prepared, you can get blindsided quickly.
What You Need to Know about Property Investments
One of the biggest factors of property investing is its illiquid nature. If you want to get your money out of a property, it’s not going to be easy to do. If an emergency simultaneously pops up when the market has hit a low point, you could end up taking a big loss on your investment.
You also have to consider interest rates and how it will affect your mortgage. If you choose a fixed rate, you’re more insulated from the rise of interest rates, but you still have to worry if the market takes a turn for the worst. While property has an average upward trend, some investments never recover from certain types of property investment.
For example, imagine purchasing a piece of raw land in an up-and-coming neighbourhood. You decide to wait to sell the land until the right developer comes along. Six months after you buy the property though, the zoning regulations change in the area. Your land is now much more difficult to build upon, causing the property value to quickly decrease.
As a property investor, you need to be willing to absorb risks because they can happen to even the savviest of planners. Here are a few steps to see if you’re in the right mindset to get started.
Is Investing in Property a Good Idea for You?
Step 1: Define Your Why
Why do you want to invest in property? The answer to this question has to be more than making money.
You need to know exactly how much passive income you need to be satisfied with your decision. It doesn’t necessarily have to be enough to quit your day job, but it should be enough to justify the resources you’re about to sink into the property.
If your long-term goals are to eventually quit your job, you’ll need to ask yourself if you’re willing to compromise your lifestyle and assets to fit the often unpredictable market.
Step 2: Assess the Risk
Every property comes with its own set of risks — even the most in-demand neighbourhoods aren’t immune.
If you decide to rent either residential or commercial property, you have to consider the inherent threats of tenants. What will happen if they miss several payments in a row? If they inadvertently or purposefully harm the property? What if rents drop dramatically in the area? These events can quickly set a landlord back, even when they have contingency plans.
If you’re purchasing raw land, you have to ask yourself if you have the time and the patience to hold onto the land until the right moment. Too many people hold onto it, hoping for a drastic increase that never comes. During that time, you still have to pay for property taxes, insurance, and other fees that can eat into your potential profits.
Step 3: Do Your Homework
Are you ready to start learning the market? Homework can come in the form of researching home prices, but it’s more than that.
You also have to note which direction each block is heading in. If there’s too much movement on a block, it can be a sign of a transient neighbourhood. Transient can be dangerous because people move in knowing that they won’t be staying for very long.
You should also consider everything from historical property taxes to financial insights in the neighbourhood. To find these, you can subscribe to the Shore Financial blog and newsletter to get monthly updates. You can also look at sites like the Australian Bureau of Statistics and Residex to start crunching the numbers.
Step 4: Find the Property
The number one rule in real estate is the location. But there are also other factors such things as money pits on even the best streets.
Whether you choose an apartment, townhouse, or single-family home, you need to ensure the property has a sound structure and attractive amenities. As tempting as it might be to concentrate on the city, you should at least consider rural areas too.
When you’re assessing each available property, remember that new is not always better. Shoddy construction isn’t always apparent until you’ve owned the property for several months. Older homes may seem like a gamble, but if they were made well, they may be able to withstand more pressure than their newer counterparts.
Appraisals, home inspections, and pest investigations can go a long way toward assessing the true character of the home beyond the facade.
Step 5: Seek the Right Investment Loan
There’s a lot to consider when it comes to the investment loan you choose. Interest rates, mortgage insurance, and property taxes should all factor into your decision when determining how much property you can afford.
The best type of loan will be one that works for your investment strategy. For example, if you’re planning to rent out the home on a fairly short-term basis, you may want to look into an adjustable-rate mortgage. However, if you’re in it for the long run, it usually makes more financial sense to choose a fixed-rate option.
Always consider the fees for breaking a fixed mortgage and what they will mean for your investment goals.
Your Next Step
If you’re looking to take the next steps toward owning property, Shore Financial is here to guide you through the tough decisions. Schedule an appointment with us today, so you can get the advice you need to find a loan that works with both your budget and expectations.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.