Property Investment Tip #1: The most important – plan and research before you buy
Now that you understand the risks in property investment from the previous section, I’ll show you how you can manage and reduce those risks by PLANNING and doing RESEARCH before you buy. This is my number one tip in property investment. It’s also the key to property risk management. Without adequate planning and research, you can easily end up with a disastrous investment. In the subsequent section, I’ll share with you other property investment tips to help enhance your property investment skills.
“Risk is like fire: if controlled it will help us; if uncontrolled it will rise up and destroy us.”– Theodore Roosevelt (26th US President)
Here are some of the things you can do as part of planning and research for property investment:
One of the most important parts of planning is budgeting. That means budgeting for the purchase and ongoing ownership. Firstly, you’ll need to determine what purchase price you can afford. To do this, you’ll need to look at how much you can access for the deposit towards the purchase and how much you can actually borrow from the bank. Your finance broker will be able to help you in this step.
After understanding what you can afford to buy, you’ll need to evaluate your ongoing cash flow, which involves looking into the following:
- Your income from work
- Your regular expenditures to maintain your lifestyle
- The rental income you receive from the investment property
- The ongoing costs you need to pay to keep the investment property
As property ownership incurs ongoing costs, you’ll need to also make sure that you can afford the investment expenses on an ongoing basis. You’ll need to find out the property’s ongoing costs when you’re doing your research. You can get an idea of the potential rental return of the property by asking a licensed real estate agent in the area to do a rental appraisal for you.
Whilst leveraging allows you to make more money from borrowed money, you should avoid over-leveraging by buying within your capacity. Don’t aim to buy more than what you can afford. If you can’t afford it, avoid it until you can afford it. In addition, you should always leave some backup funds in your pocket to meet any unexpected expenses such as unexpected vacancies and repairs.
Establish an investment strategy
In our previous article, I’ve discussed the different ways of investing in property. As part of the planning process, you should come up with an investment strategy that’s suitable for yourself. Different investment strategies require different levels of knowledge, responsibilities, and commitment. You’ll need to first understand your goals – what do you want to achieve in the investment? You’ll then need to determine your level of knowledge on the strategy, the amount of commitment you wish to contribute, and the amount of risk you’re willing to take.
For example, the strategy of buy and flip will require you to have a good understanding of the property market in a particular area. Only then will you have a good sense of what’s a good price. If you’re looking to renovate the property and then sell, you’ll need to have the time, knowledge, and connections to complete the renovation project. You’ll need to know where to find trustworthy tradesmen, regularly track the progress of the project and have a good understanding of how renovation works.
Just like many other things, property prices depend on supply and demand. If there’s a high demand, the prices will go up. If there’s a high supply, the prices will go down.
As a property investor, you’ll want to aim at buying the right property at the right price. To achieve this, you’ll need to do your research. When it comes to research, there’re two main parts: market research and property research.
Market research refers to finding out how the property market is performing. You can look at a few things to determine how the market is performing:
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To have a better understanding of property values, look at current and past sales data. Are property values rising or falling? Look at the median house/unit price data. Has it been going up or down? This will determine whether the market is in an upturn or a downturn.
Days on market
Days on market (DOM) refers to how long it takes for a property to be sold. If the DOM is short, it indicates a hot market. A long DOM indicates otherwise. When looking at this data, you should look at data for multiple properties in an area rather than just one or two. That’ll give you a better indication of the overall market performance.
Auction clearance rates
Auction clearance rates refer to the percentage of the total number of properties sold during the week or month. It’s an indicator of market activity – the more the sales, the higher the auction clearance number. A rate over 70% is generally an indicator of a hot market. However, it’s also important to pay attention to the volume of sales. It doesn’t mean much if the clearance rate is high when the sales numbers are low.
Rental yields refer to the amount of rental income that can be earned according to the property’s value. Rising rental yields generally indicate a strong demand for rental accommodation. On the other hand, falling rental yields can indicate a fall in demand for rental accommodation. Falling rental yields may also mean that you’ll need to drop the rent in order to compete with other rental accommodations.
Vacancy rates refer to the number of properties that are vacant or not occupied. A high vacancy rate may indicate that there’s an oversupply of property. A vacancy rate below 2% generally indicates high rental demand.
These data can generally be obtained from popular real estate websites such as domain.com.au and realestate.com.au. Note that these data, however, can be location-specific. For example, property prices may be falling in one suburb but rising in another. Therefore, it’s important to look at these data for all properties that are of interest to you.
Related Post: Property Investment Guide Part 1 – The Risks
One of the main factors that determine the value of your property is LOCATION. You always hear property specialists say location, location, location… This is exactly what they mean. When you’re looking to buy an investment property, it’s important to buy in the right location. This means the right state, right suburb, and right street. A good location usually consists of the following:
- High rental demand
- Population is growing
- Average income is growing
- Close to transport, shops, schools and leisure facilities
- Good access to employment opportunities
Once you’ve decided on the location, you should then look at the features of the available properties. What distinctive features does it have? How many bedrooms, bathrooms and car spaces does it have? What’s the size of the property? Can you do improvements to the property? You’ll want to make sure that its features justify its price. By comparing similar surrounding properties, you can get a better understanding of what’s a good value.
As mentioned above earlier, you’ll also need to determine the costs of owning the property. Generally, the main costs of investment property ownership are council rates, water rates, and strata rates (if you’re buying an apartment, unit, townhouse, or villa). Note that these costs vary depending on the property and its location. Other costs include land tax (depending on the state or territory and the value of the property) and insurance premiums – particularly building insurance and landlord insurance.
Once you’ve selected your ideal property, you’ll need to do your due diligence research. If you’re buying a house, you should order at least a building and pest inspection report. This will show whether the house has any building or pest concerns. If you’re buying a strata property (e.g. apartment, unit, townhouse or villa), you should order a strata report. This will show whether the property has any building issues or strata management issues. A good property solicitor or conveyancer will be able to help you order the necessary reports.
With adequate research, you’ll be able to determine whether the property is a good investment.
Other property investment tips
In addition to planning and research, here are some additional tips for the savvy property investor:
Property Investment Tip #2: Ensure that you have a steady income
As mentioned before, property ownership incurs ongoing costs. As a result, you’ll need to have a steady income in order to pay for the ongoing expenses. If you rely on your work income to fund the ongoing expenses, you should have a stable job. If your job is unstable or you can foresee changes to your employment arrangements, you should set aside your property investment ambitions until you’re in a better position.
Property Investment Tip #3: Regularly review your property investment
You should regularly review your property investment. Check how your property is performing by looking at market data. Have a look to see if your investment remains in line with your goals. Remember, your situation along with the property market can change. Therefore, if the investment is no longer suitable for you, be prepared to sell and invest elsewhere. Keep an eye on your situation and the property market. Stay in control and stay flexible.
You should also review your existing tenancies. If your tenant is good and reliable, consider offering them incentives (e.g. lower rent) to stay. A bad tenant can give you a lot of trouble down the track.
Property Investment Tip #4: Have protection plans in place
Protection plans can protect you, your assets, and your family in the event of the unexpected. In addition to building insurance and landlord insurance as mentioned above, you should look at buying insurance for yourself. This includes life insurance, disability insurance, and income protection insurance. You should speak to an insurance professional to determine your insurance needs.
You should also speak to a qualified solicitor to discuss your estate planning needs. Your estate plan will include your Will, power of attorney documents, and possibly other documents depending on your needs.
Property Investment Tip #5: Property management
When you have an investment property, you have the option of managing it yourself or engaging the services of an agent to manage it for you. Whilst managing the property yourself can save you some money, it may not be the best option – particularly if time is very important to you. Managing a property requires a lot of time and energy. You’ll need to conduct inspections regularly to ensure that your property is well looked after. You may also need to manage conflicts with the tenant when there’re disagreements or problems.
If you have more than one investment property, it’s highly unlikely that you’ll be able to manage them on your own. Therefore, instead of spending time managing the property, a better approach is to spend time looking for a good property management agent. A good property management agent can help you:
- Find a suitable tenant by conducting reference and database checks
- Conduct inspections for your investment property as needed
- Collect rent
- Increase rent when feasible
- Pay the property’s ongoing bills from the rent received
- Chase unpaid rent
- Take action for unpaid rent or other problems with the tenant
Property Investment Tip #6: Diversification
As the proverb goes, “don’t put all your eggs in one basket.”
This concept also applies to property investment. You should avoid buying in one area. Having all your properties in one area can be dangerous. If a downturn occurs in that area, it’ll be devastating to your portfolio. Therefore, diversification is very important. This can be achieved by buying properties in different locations and with different characteristics.
Growth doesn’t happen in one area. Therefore, why should you focus on one area when there’s added risk? Take a look at the table below:
This is just one example for Melbourne, Sydney, and QLD. As you can see, growth is seen in a variety of suburbs.
In saying this, you should also look at broadening your location criteria when you search for your investment property. You’ll be able to find more choices that way.
Property Investment Tip #7: Be aware of the salesmen
When you search for your investment property, you’ll be dealing with a lot of real estate sales agents. Generally, the goal of the sales agent is to sell the property for the owner. Therefore, it’s likely that they’ll be telling you a lot of good things about the property. As a savvy property investor, however, you should not totally rely on what the agent says. You should always do your own research on the property and form your own judgement. You should also look for the cons of the property, and then make a decision by weighing the pros and cons.
In summary, planning and research before buying are very important in property risk management. In the planning phase, you need to come up with a budget. The budget will tell you what property you can afford to buy and whether you can afford the property’s ongoing expenses. You also need to formulate a property investment strategy. This is a strategy that’s suitable for you according to your investment goals, level of commitment, and risk appetite. In the research phase, you need to understand how the property market is performing. You also need to dig into the properties you’ve selected. This means you need to have a good understanding of the property’s characteristics, features, pros, cons, and ongoing costs. Remember, LOCATION is absolutely important. Other important tips that you should keep in mind are the following:
- Ensure that you have a steady income
- Regularly review your property investment
- Have protection plans in place (insurances and estate plan)
- Have a good property management agent
- Diversify your property portfolio
- Form your own judgement on the property rather than relying solely on what the sales agent tells you