Key Insights for Buying Your Very First Investment Property

More and more Australians are getting into property investing. In fact, more than 1.7 million Australians currently own at least one investment property. When done right, property investment can be lucrative and secure your future even after you retire.

However, as with any other major financial decision, it is important to do plenty of research before buying your very first investment property to avoid making common mistakes that will negatively impact your Return on Investment (ROI). We’ve come up with several key insights to help you get started on the right path.

Choose the Right Type of Property 

When it comes to property investment, you have several options available to you. If you want to start small when it comes to your budget, apartments and condos tend to be more affordable than single-family homes. However, keep in mind that residential buildings may have specific rules regarding renting out your property and renovating it, which might affect how it attracts potential tenants. With a single-family home, you can set the rules yourself, but the purchase price will likely be higher.

Choosing the right type of property involves careful consideration and several factors such as your budget and aims (short- or long-term leasing vs. flipping and selling). Take the time to evaluate your options and your goals in advance. Your real estate agent or property manager can provide a wealth of information to help guide you towards the right decision as can your broker.

Check Your Finances

If you’re planning to apply for a mortgage loan, you must consider what banks will most likely look at. Items such as your credit rating, assets and income, and outstanding debts can make or break your application. Also take note that monthly payments and the interest will eat into your profits. When you are between tenants, you’ll still have to make your loan repayments.

It is also a good idea to set aside a portion of your income to cover the repayments when you don’t have a tenant in your property. In setting your rental price, check similar properties in the area. If you set your price too high, you may have difficulty finding tenants. But if you set it too low, you’ll be missing out on serious income over time.

Renovate Wisely 

Renovations and repairs can add value to your property and attract more potential buyers or tenants. However, you shouldn’t go overboard. Think about the cost of each renovation in comparison with the value it will add to your property and focus on the areas that matter more to renters, such as the kitchen, bathrooms, and bedrooms. For example, a kitchen remodel can return more than 90-percent of its cost in added value. If an area is in dire need of structural repair (e.g. an uneven floor or unstable walls), prioritise it to avoid any household disasters (which can get messy and expensive if someone gets hurt).

If you’re planning to renovate a condo or apartment, you must focus on maximising the available space and making the whole place look bigger than it really is. If you need more details, we’ve listed down the specifics on how this could be done in a previous blog.

Bring a Buddy with You

Speaking of repairs, it pays to have someone inspect the property with you, a person who knows all about fixing a property. Having an additional pair of eyes with you is beneficial in terms of spotting hidden structural defects which you might otherwise miss if you’re alone.

By bringing someone with you, you’ll have a better idea of the needed repairs, how much time it will take, and the cost involved. They will also be able to give you an objective answer on whether they think it’s a good buy. Having someone with you who can look at a property objectively is beneficial as many of us tend to fall in love with the first property we see.

Consider the 50% Rule

The 50% rule is a basic concept property investors use to have an estimate of the total expenses they’ll have to shoulder for owning a rental property. It states that, in general, one can expect that expenses—taxes, insurance, maintenance—will be half of the monthly gross rental income. Factor in the monthly mortgage and it gives you a quick analysis of whether a rental property is a good buy, based on forecasted monthly returns.

For example, if a property currently generates a gross rental income of $4,000, then $2,000 will be the estimated overall monthly expenses. This leaves you with $2,000 and, if the monthly mortgage payment is, say, $2,500, then you’ll have a negative ROI of $500. The aim of course is to have positive ROI. If that’s not possible, then you’ll have to find either a more affordable loan or another property.

The 50% rule is by no means exact, however, especially since expenses fluctuate monthly. As such, we also recommend analysing it together with a financial expert to make an informed decision, and we at Clever Finance Solutions can help.

Check Out Similar Properties

For property investors, it’s important to assess how a property will perform in the long-term. One way to do this is by checking out similar properties within the area and researching how their rental values have changed in the past few years.

Then, consult with financial experts to know how the rental values are forecasted to change in the next few years. Doing so gives you a more accurate view of how much net income you’ll make in the long run or how much the property will go for if ever you sell it—two things you should consider before signing on the dotted line.

Location is Always Key

As we’ve said in previous blogs, location is crucial in property investment. You may have a nice-looking property but, if it’s within, say, a location that doesn’t have easy access to the city centre or looks run-down in general, then it won’t attract many deals, and the rental or purchase price you put on it may not be as high as you wanted.

As such, it’s always wise to check if an area has good potential in terms of property market growth. Look out for key indicators such as convenient access to amenities and public service facilities, employment opportunities, and strong local market trends. For property investors, it’s never a good idea to invest in an area you know you wouldn’t want to live in as well.

Talk to the Neighbours

Take the time to chat with the people already living near the property you’re eyeing. Those who reside in the area will have unique insights into the local amenities, as well as the benefits and drawbacks of that particular location. They’ll be able to tell you information on the “real living condition,” something that real estate agents might miss. This will give you a better idea of how things really are in that location beyond the sales talk. Some of the things residents will be able to tell you are important information on community features, rules, and safety issues that aren’t necessarily obvious to outsiders.

Get Help When You Need It 

Your first investment property can be really challenging, which is why it’s smart to seek expert help. Here at Clever Finance Solutions, we have the experience and expertise to guide you towards making the most out of your investment properties, securing the best loan deal, and making the right financial decisions. After all, you’re more than our clients—we’re partners in securing for you and your family a better financial future. Contact us today and know how we can be of service.

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