Real estate investing can bring great returns, especially if you buy the right properties with a high growth yield and have a good long-term strategy in place.
Residential property as asset class increases in value over time and that combined with high leveraging against its value means its terms are magnified.
Here are 5 key considerations when investing in property:
1. Assess and Minimise the Risk
As with all investments, there are risks associated with real estate investing.
These may include:
- Unable to guarantee that properties keep rising
- If cash flow is not managed well it could lead to problems as you are taking on debt to acquire the property
- Rental prices falling
- Interest rates rising over time
- Vacancies (no tenants)
- Unstable income – loss of job
- Cash flow burden when playing principle plus interest as opposed to interest only.
Interest payments are tax deductible, repayments are not
- The potential for tenants to damage property
- Natural disasters
However, all risks are minimised with the right strategy and insurances in place.
2. Seek Assistance
Location Property Group can help with sourcing investment properties either off the plan or in the current market.
If the property is in Sydney Location Property Group will manage the property for you.
If the property is interstate, we can recommend property managers we use on our own properties to help look after your investments.
We will appraise your property at points in the future. Whether it’s to use the property to purchase additional properties or to help you sell a property to help realise your gains.
3. What Sort of Interest Rates Should I Expect?
When taking out a loan for real estate investing, you are looking at rates of around 3.95% – 5 % in the current market.
Interest only loans are higher than the principal plus interest rate.
4. Managing Finances
Consider the financial implications and whether you have enough funds to cover the mortgage, rates and any repairs.
Will the Rent Cover My Mortgage?
If you use an interest-only loan, it’s very likely after paying the deposit and claims depreciation that you will be cash flow positive after tax.
How Much Would I Need in the Bank for Repairs or the Unexpected?
For a house, a reasonable amount of savings would be $20k to cover the costs of any repairs.
A unit would require much less, around $5k – $6k.
5. How Much Equity Do I Need for an Investment Property?
Generally enough equity to cover 20% deposit of the new property.
To calculate the amount of equity: start with 80% of the current value of your property then deduct any loans or bank guarantees against the property.
That gives you the amount to take off 80% of the current value.
For example a $500k property on an 80% loan. Borrowing $400k and putting down a $100k deposit.
Owned for 3 years. Revalued at $600k. You would then be able to borrow $480k on the home (80% loan).
This $80k extra could be used as a 20% deposit on a $400k investment property.
Case Study: Newington Athletes Village
Ajay Valanju, our Director, bought a house in Newington athletes village in 2000. This was a 3 bed 2 bath 1 car.
It was purchased before the Olympics, for $400k and was later used to house athletes during the games. There were lots of houses like this one and they were all retrofitted after the Olympics.
1 year after signing, the property was ready and exchanged for $400K. Valuation 1 year later was $480K. He was then able to borrow $480k x 0.8. He borrowed $384K and put down 16k deposit.
When the exchange took place in 2001, he didn’t use cash, rather a bank guarantee of $400 every 6 months. It cost him $800 to exchange contracts.
With only a 16k deposit he hardly invested any money.
As the value grew he was able to borrow against it and eventually sold it in 2012 for $783k.
This shows that if you buy well and leverage off negative gearing you can grow a profitable investment portfolio.
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If you are looking for advice or would like to work with us on your real estate investing journey please give us a call on: 02 9439 3188.