1. Get organised
Before you even make the first step towards property research via mortgage based websites, make sure that your finances are in order, and that you understand all of the terms and conditions, and fees and charges associated with the home loan. Pre-approval of your loan will greatly assist you in negotiations when the contract of sale is unconditional to finance. It will offer you a better bargaining position, as vendors can be very wary of 'subject to finance' clauses.
2. Determine your strategy
You should determine your purchasing level upfront, and evaluate whether it meets your income and growth expectations. For example, if you want a high rental return, consider apartments in areas close to universities, trendy cafes, transport and hospitals, where there is sure to be a constant supply of renters. Conversely, if high capital growth is the target, look for areas with proven records of capital growth and sustainability, such as inner-city period homes. Every capital city in Australia has a circle of heritage properties within 15km of the CBD, and these historically have patterns of strong capital growth.
3. Get the location right
We’ve all heard it in a commercial sense, but ‘location, location, location’ really is critical. The property needs to be in a good location close to schools, shops, transport and recreational facilities. Quiet, leafy suburbs, areas that offer ocean views and proximity to parks and gardens are ideal settings for your property.
4. Identify the potential
The property should ideally have the potential to be renovated. It needs to have a neat and clean kitchen, toilet, bathroom and laundry facilities – and if it doesn’t, you should upgrade these aspects as soon as possible. If you’re considering a renovator’s delight, be very careful not to overcapitalise on the renovations. A decorated mansion in an industrial location is sure to fail, so remember that prudent research is the key.
5. Research the industry
You can find out information about capital growth, movements in property prices and average rental yields for each suburb or town in Australia through resources such as RP Data and Residex. Their suburb reports will give you a good indication of future growth patterns, and an idea of cost comparisons of property sold within the area you’re interested in. Local real estate agents can also give you real market information about rental yields, vacancy rates, and the types of properties that are currently in demand with renters.
6. Be budget-conscious
Make sure you consider all of the costs associated with the purchase of your investment property. These include acquisition expenses such as stamp duty, legal fees, building inspection costs, and bank and mortgage establishment expenses. Ongoing property management expenses will include water and council rates, body corporate fees (for apartments and townhouses only), sinking funds, accountancy costs, agent management fees, property insurance, repairs and maintenance.
7. Consider CGT
Remember that when you eventually sell your investment property it’s likely that you’ll incur a liability to pay Capital Gains Tax (CGT). This is a complex tax and requires professional advice, especially for investors who are considering purchasing property through their superannuation funds. Your accountant can assist you in reducing your liability, and will inform you of any changes to CGT. Keep in mind that this tax isn’t applicable to the family home.
8. Depreciate your assets
Many property investors are missing out on potential tax benefits by failing to take advantage of the full tax depreciation potential of their investment. New or near-new buildings are depreciable over a 40-year period at a rate of 2.5% pa. Fittings and fixtures depreciate more quickly and can be written off over a five-year period. Professional advice from a quantity surveyor is warranted to maximise your depreciation claim.
9. Manage the property
Ideally you should enlist a qualified property manager to screen and locate a suitable tenant. This is certainly money well spent, as a property manager will prepare the leasing documents, arrange the bond, collect the rent, conduct regular inspections and arrange for repairs on the property as required, all for a nominal fee of less than 10% of the rental income. These fees are also fully tax deductible against the rental income.
10. Search interstate
Consider looking outside of your state for potential property investments; it’s a great way to diversify your investment portfolio and keep up with market trends and property cycles throughout the country. This strategy also minimises your land tax liabilities. Consider the mining and rental booms in Queensland, South Australia and Western Australia, or the current situation in the Melbourne residential property market, which is experiencing record property price growth.
John Kovacs, managing director of NMDDATA, has worked in the real estate industry for 15 years. His website, www.nmddata.com.au, is fast becoming a major reference point for mortgagee and deceased estate properties for sale in Australia. For further information e-mail firstname.lastname@example.org or phone 0417 998 793
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