Why Invest in Property?
If you are looking to buy your first investment property it may seem like a daunting task. With so many unknown variables you might wonder if youre making the right decision. If you are a seasoned property investor you will have learned, gained experience and overcome many of these concerns, but there is always that lingering thought, where should I next invest?.
Everyone knows the stock market. In fact, most investments made for negative gearing are made on the stock market. Whilst this is a proven strategy, the stock market can be volatile. Property on the other hand is a fixed commodity; an always growing asset that consistently shows returns.
A property investment should be made with a longer investment cycle for greater returns. Quick buying and selling rarely offers fast returns.
At Probity Investments, we are here to work with you, guide you and help find the right property for you.
Investment Fundamentals for Buying Property.
When buying property, there are key variables that need to be considered.
Budget.
Knowing how much you can finance for a property is the first requirement. This means you are not wasting your time being presented with options that are outside your financial capacity. Knowing your budget and borrowing commitments is step one. If someone consistently shows you property outside your budget capacity, you need to question if they are right for you. If you need assistance with identifying your finance options our business partners can help. Once you know the amount you can invest, the next step is how to ensure you obtain the best return.
Return.
When investing in property there are two key factors that investors look for.
1. Yield
Yield is the return calculated by looking at the annual rental income divided by the initial cost of the property.
For example, a property costs $500,000 and returns $500 per week. Annual rental income is $26,000. The rental yield is $26,000/$500,000 x 100% = 5.2%. The right yield can mean a property becomes self-funding- where the rent will pay for all the out goings. This is a good strategy for first time investors. Depending on strategy, seasoned investors may not be as concerned about yield if they are focusing on negative gearing and may be more concerned about Capital Growth.
2. Capital Growth
Capital growth is the increase in value of your property portfolio over time and should be considered alongside the property’s yield. It is Capital Growth that rewards the long-time investor and what makes a property investment worthwhile!
The perfect property is a self-funding yield with high capital growth, however yield and capital growth mean different things to different investors. Whats right for you depends on your investment strategy and your time frame for the investment.
Where to invest?
Now you know your budget and have identified the right investment strategy, the big question is where to buy.
There are many choices such as house & land, apartments and townhouses, and many locations.
Questions that need to be considered are:
- How will the property be managed? Are you looking to outsource the property management or manage the property yourself? Most investors tend to outsource and remove the emotional aspect of managing the property but some do prefer to be hands on. This could determine where is the best location for you to buy. Outsourcing to a Property Manager incurs a monthly running cost on the property but in most cases will ensure your investment is well looked after.
- A key to Capital Growth is investment in infrastructure.
- Who is your tenant? Are you looking for young families or professionals? If so, you need to consider the following. -What schools are in the area? Is there good job creation and employment opportunities? Is the property you close to shopping and entertainment facilities? Is there good public transport? Easily accessible roads? These are just a few considerations
- What are the demographic of the location and are they changing.
- What is your risk profile? Are you looking to buy in a new area with the expectation of infrastructure development, or would you prefer to know the location and what is there?
What to Buy
House and Land Off the Plan
Factors to take into consideration are:
- – Expected rent return
- – Borrowing costs and interest rate
- – Milestone payments for construction
- – Stamp Duty costs
- – Annual rates
- – Depreciation
- – Landlord insurance
- – House and Land insurance
- – Builders guarantee
- – Property Management Fees
- – Legal Fees
- – Vacancy rates in the area
- – Infrastructure
- – Job creation opportunities
Apartments and Townhouses Off the Plan
Factors to take into consideration are:
- – Expected rent return
- – Borrowing costs and interest rate
- – Milestone payments for construction
- – Stamp Duty costs
- – Annual rates
- – Depreciation
- – Landlord insurance
- – House and Land insurance
- – Builders guarantee
- – Property Management Fees
- – Legal Fees
- – Vacancy rates in the area
- – Infrastructure
- – Job creation opportunities
Supply:
With all investments the value is determined by what someone will pay for it. Property is no different. It is therefore important to look at current and upcoming supply to determine the growth value of the investment, along with the infrastructure that will support population growth.
There are stories of inner city apartments in east coast capital cities being over supplied and whilst this is true, in most cases it does not necessarily mean all inner city apartments are a bad investment. The quality of the construction and the location of the property needs to be taken into consideration to determine if a property is a good investment. When looking at a property, look at competitive constructions around it. Are there many of the same quality where you will be competing for the same tenants? Or, are they inferior and will not hold their value in 10 years time. Good tenants will pay for a nice place to live. It is also important to look at the owner occupier rate when buying. Properties with a high owner occupier ratio means the property will be looked after in years to come. A predominantly investor owned property runs the risk of not being well maintained, which could lead to further investments in the coming years.
The same can be said for house and land packages. Just because there is a growth opportunity doesnt mean this will be the case in 3 years time. If an area is flooded with new dwellings eventually this will mean the capital growth may not be as great as initially thought when the estate was first established.
Property investment is available to everyone with every budget.
The right and ability to invest in property is available to everyone. Knowing your budget, understanding your investment strategy and risk factor is the place to start. Other factors like property type, location, yield and capital growth and property management are the factors that make investing in property fun. Whats most important to remember is that no one can ever know the right property to invest in but you. At Probity Investments, we work with you to help you find the right property and guide you with all the details – for and against, to assist you in growing your wealth.
