Where and what you buy will affect your return on investment. The real estate mantra “location, location, location” is no less vital when choosing an investment property.
So should you buy the house next door?
It depends. Investing in real estate — or any investment — should be about increasing your wealth and securing your financial future. Therefore a simple rule before considering any property purchase is to understand the market where you are buying.
If you decide to invest in a house in your neighbourhood, you’ll need to do some leg work.
For example, accessing independent information from a source such as RP Data can provide crucial insights into average rents, property values and demographics. You also need to investigate whether council or government are planning works that may impact negatively on the area you’re interested in.
Putting all your eggs in the one basket may not be the wisest financial idea either. Different property markets, for example different States are often at different stages in a market cycle (i.e. one State might be booming and another might be going into a downturn). By having property investments in different markets, you can go a long way towards hedging your bets, which can be of benefit in the long run.
Of course, an advantage of buying the house next door is that you can choose your neighbours. But a disadvantage is if the value of one house takes a hit, it is unlikely the other one will rise.
It all comes down to making considered decisions, because positive returns can be delivered if the fundamentals align. Here’s 4 things to reflect on to mitigate risk:
Buying at the right time is critical
Investing in real estate is all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you can make.
Count the cost of investing
Before making the leap you also need to be aware of taxes involved in property investing and add these into your calculations. Stamp duty, capital gains tax and land tax need to be taken into account. While interest rates will vary over time, property investors can expect to increase rents when rates are on the rise and hold steady when they fall. If you need a hand with your calculations, our advisers at Allied Investment are always more than happy to help.
How you manage your investment
How you manage your investment can also determine whether you will reach your financial goals. It pays to consult professionals you can trust. Getting advice on the cost of owning an investment property and whether it is the right path for you after taking into account rental income and tax deductions you’re entitled to makes sense.
If the fundamentals check out, also consider a property manager to find the right tenant. An agent can carry out reference checks and ensure rent is paid on time. It is money well spent [and tax-deductible] in the quest to get the best possible value from your property.
While there’s no doubt investing in property can put you on the path to long-term wealth, it should be seen as a medium to long-term investment to maximise returns. That’s because if you sell it within 12 months you’ll be slugged with a hefty capital gains bill. If you sell well after that then a 50 per cent CGT discount applies if the investment property was originally purchased with the intention to hold it.
Also, it worth noting that it typically costs 5% of the purchase price to get into a property in taxes (i.e. government stamp duty) and fees (i.e. bank fees and Solicitors costs) and up to 4% (i.e. real estate agent fees and advertising costs) to get out. So for every $100,000 you spend on a property, you need to make back an additional $9k before you break-even on any sale.
Critical to a positive outcome is being able to maintain mortgage repayments. So structuring your loan correctly is key. This can be done with the help of a trusted financial adviser and licensed mortgage broker. Allied Investment Group can help you decide whether investing in property is the right strategy and give advice on how to finance the investment. Call 1300 886 149 to put your property plans in place.