Thinking of buying an investment property? 5 questions to ask yourself before you take the plunge.
1. Timing
Q. What’s happening in the market? Is the market rising, falling, has it peaked or bottomed?
The time to buy is when everyone is selling and prices have fallen however, we often rush out and buy when the market is on the rise for fear of being forever priced out of it. Whether you are buying close to home or interstate, find out what is happening in that market. Choose an Independent source to gauge the market – don’t listen only to the ‘local agent’ he/she may not be a rogue but they do have a vested interest. Research, research, research before you take the plunge, talk to your accountant and hang on to the property once you’ve got it. Here are some useful websites to visit -
http://www.pulseproperty.com.au/
http://www.bis.com.au/reports/res_prop_prospects_r.html
http://www.hudson-institute.com/property-investing.html
Note: to benefit from The Hudson Institute you would have to become a member. It is a financial planning company offering Wealth Creation (including building a share market portfolio and advice on property investment), Wealth Education and Wealth Protection to its members. We have been members since its inception in the mid ‘90s and it is one of the best things we have ever done.
2. Objectives
Q. What do you want the property to do for you? Deliver an income, increase in value or both?
Income and capital appreciation are obviously closely linked and best achieved over the long term. Maximise income by keeping the property tenanted at market value 99% of the time. Choose tenants carefully and offer a 12 month lease (not longer unless you include a rent review clause and definitely do not plan to sell). When the vacancy rate is high it may take a few weeks to find a new tenant. Reducing the rent a little may ensure you keep the property occupied – no tenant = no income. Property trading is not true investment. Traders make money by buying ‘down’ and selling ‘up’ i.e. buy an old (or abused) property in a down market, do it up and sell for a profit. To be successful at this you need time, knowledge of the market and the ability to do a lot of the work yourself.
3. Type and age of property
Q. What type of property do you have in mind? A house and land on separate title; a townhouse or villa in a small strata complex; an apartment in a large strata complex?
House and land
Like many you probably hold the view that it is the land that appreciates whilst the building on it constantly depreciates - and that is true. Consider though the age and condition of the building. An old house on a large subdivisible block sounds like the perfect investment but it may require very high maintenance yet achieve a low rent return because good caring tenants don’t want to live in it. With this type of purchase it is important to at least have a pre-purchase building inspection; termite inspection and an electrical wiring inspection. I would also have the plumbing checked especially if there are lots of trees and shrubs around as their roots love to find their way into the old clay pipes which become clogged and may even rupture resulting in leakage, an extraordinarily high water use account and subsequent expensive repairs or replacement with plastic piping. If the block is large with extensive lawns, tenants will not want to pay high ongoing costs for lawn mowing or pruning. It is best to incorporate this into the rent and employ a contractor. If you are relying on the zoning for future subdivision, check at regular intervals with the council planning department. Rezoning is common and is not always for higher density of the block you plan to purchase.
Townhouse or villa
A property in good condition should require minimal maintenance. Consider the available parking because a single small carport with no visitor parking may limit the tenant/s and therefore the amount of rent. Check also if there is an active strata company, some maintenance of common property may be necessary. Without a few rules and someone appointed to keep an eye on things, even newer complexes can end up looking unkempt and arguments arise with unpleasant consequences. In a small complex there may be no quarterly levy but a small contribution to maintenance of, for example, the driveway or front verge.
Apartment
The good thing about this kind of property is that there is only the interior of the apartment to be concerned about, isn’t there? Yes, but you would own undivided shares in the common property which has to be maintained and to this end you will be obliged to pay levies on a quarterly basis. If the structure is old, major renovations may be needed which could mean that additional funds are required in the form of a special levy. This can prove expensive. The strata company manager is an important cog in the wheel here and there are good and bad as in any industry. Even though you may want no involvement in the owners’ council or any of the business to do with maintenance of building or its grounds you should scrutinise the financial records of the strata company and if you have concerns, after you have bought, attend meetings or appoint a proxy to attend on your behalf.
4. Location
Q. Where would you like the property to be – up to 10kms from the city or in the outer suburbs 30+ kms from the city?
Many first time investors like the idea of the property being close to their own home so they can ‘keep an eye’ on it. If this fits you and you live in an outer suburb you can still choose property that is close to amenities and infrastructure such as train and bus routes, shops and schools, medical facilities and so on. It is easier to find, and keep, tenants when amenities and work are within easy reach. Investment property that is 30+ kms from the city will not appreciate as quickly as a similar property 10kms away or less because the land value component has greater value the closer you are to the city, ocean or the river. Nor will it achieve as high a weekly rent and in downtimes it will also be affected to a much greater extent from a drop in the market value and high vacancy rates so be sure to take this into account.
5. Management
Q. Do you intend to manage the lease yourself or employ a real estate agent to look after things for you?
Many investors successfully manage their own property. Provided you treat it as a business and follow the rules you will certainly save an agent’s management fee. If you are not sure what the rules are (in WA), go to the Consumer Protection website - http://www.commerce.wa.gov.au/ConsumerProtection/Content/Real_Estate/Renting_and_tenancy/Landlords/index.htm - and get a copy of their excellent publication Renting Out Your Property - An Owner's Guide [PDF 1.14mb]. Or ring the Call Centre on 1300 30 40 54 to get a print copy. You can also get a Landlord’s pack with all the forms you will need (and some you won’t need - hopefully) When you don’t want to be involved, there are plenty of specialist property managers around. Most agencies have a property management division. It’s worth understanding that the role often becomes one of people management rather than property management and finding the right Property Manager for your property is important. Biggest is not always best here. It is very different from property sales. It can be a very high turnover department in some agencies as young property managers assigned only to carrying out property inspections find the role onerous and quickly move on. Continuity is best for all concerned and you will usually find a greater commitment from an individual running their own business with an assistant (or two). Ask for references or an opportunity to speak with someone currently using the service of a property manager you think you would like to use.
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