Intro to property investing
Property investment can be seen as the goose which lays golden eggs – an easy way to make money. But the truth is it takes a lot of effort to make your investment work for you.
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Finding the right place
Good properties are hard to find – you will have to make offers on a lot of places and take a look at even more.
You want to look at areas where the vacancy rate is low, so you don’t have to worry about having the place empty while you look for tenants. And you’ll want to make sure the area you buy in is growing in value – so your money will come from capital gains as well as rent.
Either look for a place which is in good condition, or be willing to spend money on doing renovations – and be sure of getting a return on the money you spend on doing that work.
Target multi-income properties. Not only are these likely to give you the best yields, but you’ll only be competing with other investment buyers, so the market is less frantic.
Look at yield, not price
When it comes to investing, it’s most important to get work out what yield you’re going to get. This is the amount of money the property generates per year minus anything you spend on maintenance, rates and other costs, divided by the value of the property. You want to get a yield of 6% per year. You can take steps to increase your yield – like those renovations – but be aware they will cost money at the outset.
What gear are you in?
Gearing is essentially borrowing money, usually at fixed interest, which is then used to produce more money than the interest paid.
A positively geared property is one which makes a positive yield – rent will cover your payments and make you a bit of cash.
A negatively geared property is one which costs more to own than it brings in. There are a few reasons to own a negatively geared property – you expect to make a capital gain from selling it which will make up the shortfall; you want to limit the amount of tax you pay as some of the maintenance you do on the property can be claimed back from your tax payments; or you are buying a property for a family member (usually a child) to live in and the shortfall is essentially how much you are subsidising them to live.
Owning a negatively geared property can limit your investment plans, as banks are less willing to lend against them.
Be willing to put in the work
Beyond finding the place, owning an investment property takes work. Finding and managing tenants, making sure they’re not destroying your property, arranging for maintenance when needed, and plenty of other time-sucking activities. A property manager can take some of the work out of owning an investment property, but using one will lessen your returns.