10 Tips before purchasing your first investment property
I often see people around me rushing to buy their first investment property without thinking it through. It baffles me that someone could spend $400k, $500k or $600k on something without thoroughly thinking it through first. Here are some tips I would share with anyone looking to buy their first investment.
1. Don’t get emotional
You should not buy an investment property because you “like” it, or because it’s a character home, or because it has lovely floorboards. You should buy an investment property based on its cash flow and potential for growth. Period. Do NOT get emotional about an investment property.
2. Have an exit plan
Don’t just buy an investment property because you think it might be a good idea or because everyone else seems to be doing it. Have a plan for your life. Is it financial freedom? Is it cashflow? What do you want your life to be like in ten years’ time? Are you buying this property to hold for the rest of your life? Or to sell in ten years when it's realised some growth? Or are you purchasing the site because in the future it might have rezoning potential? Make financial decisions, including whether to purchase an investment property, based upon your life plan. If you don’t have a financial plan, even if you’re only 23 years old, you should get one, now. And don’t buy an investment property until you do.
3. Don’t negatively gear
The definition of an investor, according to Investopedia, is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns.
Negative gearing means purchasing a property that will lose money each year in order to write off some tax from your earned (or other) income. I don’t care how you look at this, you’re still losing money, and if you’re losing money then you’re not an investor, by definition.
4. Do the numbers
If you don’t do your numbers before purchasing an investment property, you probably won’t have a clue whether it’s negatively geared or not. You need to create a profit and loss/income statement for the property, as well as how it affects your tax position.
If you don’t know how to do this, figure it out, ask your accountant, and make sure you understand it before buying.
5. Buy a property with depreciation available
In my opinion, it makes sense to buy a newly constructed or newly renovated home. This gives you the maximum depreciation possible, which can reduce your taxable income, which means you pay less tax. Not only this but buying a new home is much easier to rent and will have less maintenance associated with it.
6. Don’t rush into it
Don’t buy the first house you see that looks nice or seems to add up. The deal of a lifetime comes around approximately once a week. There will be more, and much better ones. Ensure you’ve done your research (see number 8) and by the time you’ve looked at 50 properties in the area you’re looking in you’ll be a pro at spotting the best deals and will be able to make a much more informed decision.
7. Get good insurance
It should go without saying that you need to insure the building with public liability insurance attached to it. But you should also insure for “landlords insurance” which covers you if the tenant leaves unexpectedly or damages your property. I know someone who was very lucky to have tenant damage cover on their policy when their tenants left over $120,000 in damage! Not only did the insurance company pay for all costs associated with repairing and replacing damaged appliances, walls and fittings, but there were seriously good depreciation benefits from the newly renovated home thereafter!
8. Do your research
You should make sure you’re well educated in the properties in your area. You should research market rents, capital growth and whether the property relies on one single industry (ie. mining!). If you don’t know anything about building, then it’s probably a good idea to arrange a building and pest inspection on anything you’re looking at buying too. Know what your finance limit is. Speak to your accountant. Get your solicitor or conveyancer to check the purchase contract. If you can’t afford to pay for a good accountant or solicitor, then you can’t afford to buy a property.
9. Don’t self manage the property
Don’t be stupid, just don’t. Get a property manager. I’ve been there, done that and it’s just stupid. Don’t be stupid.
10. Get the right advice
Ever heard the phrase “money doesn’t grow on trees” before? Have you EVER heard that coming from the mouth of someone with lots of money? Unlikely. The moral of this is - don’t take advice from people not qualified to give it. And don't take legal or structuring advice from someone that's not an experienced solicitor or accountant. Not only that, but when getting advice, follow the money. How does that financial planner or mortgage broker get paid his or her commission? Does that advice really serve you, or them?
Join the VIP List
Be the first to know about Citify's upcoming projects.