Investing In Real Estate – Guidelines Plus Tips
Why Investing in Real Estate is Popular in Australia?
Investing in real estate can be less volatile than shares or other investments and is considered a fairly low risk investment. Low risk investments are always popular and housing in metropolitan areas is constantly in demand.
Houses and units seem easier to understand than many other types of investments. Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that it is a sound investment.
The real estate investor has a bit more control over the risks and the high purchase price is often offset by a possible annual return between 4% and 8%.
Buyers can benefit from capital growth once your property increases in value over time. Many people like the idea of an investment that could create a source of income in their retirement. Rental housing is one sector that rarely decreases in price, making it a good option as a long term investment.
If you take out a loan to purchase an investment property the interest on the loan is tax deductible as your investment is a tangible asset.
A number of other deductions can be claimed on your tax return, such as repairs and maintenance, rates and taxes, insurance, agent’s fees, travel to and from the property to facilitate repairs, and building depreciation.
Tax deductions may also be claimed as a result of negative gearing where the cost of keeping the investment property exceeds the income gained from it.
Another benefit is when you decide to take out another loan or invest in something else. Good payment history is highly regarded and the property could prove useful as security when taking out another home, car, or personal loan.
Real estate investing has shown to be an excellent source of profit as value increases over time. Upgrades to the improvement and functionality of the property can significantly increase value. Keeping the property interesting to the potential market will at the very least help you retain value.
Investment properties can be purchased at 80% LVR (loan to valuation ratio) or up to 90% LVR with mortgage insurance. This means that the higher leverage capacity results in a higher return for the investor at a lower risk due to having less personal finances tied up in the property as 80% of the purchase price are provided by a mortgage.
Although your fixed mortgage will remain constant, inflation that drives up home construction costs will certainly also drive up rentals. Current population growth rates create housing demand, again driving up rent prices if supply cannot keep pace.
Finally, there are opportunities to buy below market, but the other advantages will probably be what the average investor experiences most of the time. If the opportunity arises to purchase a value-priced property, it becomes an immediate way to increase your net worth and the value of your investment portfolio.
How To Get Started Investing In Real Estate
So, you are considering getting started as a real estate investor. You’re probably also thinking that it seems rather overwhelming when you look at the whole picture. Well, never fear because you’re about to learn a few things, and the more you know the easier everything will seem.
Before making an investment in real estate, analyze the current market and do your research. Investigate as many as 100 individual properties in that area; track your notes with a spreadsheet or database. Things to list include current pricing, projected rent earnings, and repair budgets. This information will help you find the best deal.
Make sure that you set realistic goals based on the budget that you have. You should not set a goal to buy ten houses in the span of a month if you only have a hundred thousand dollars to your name. Set reasonable expectations to avoid setbacks at all costs.
Location is very important in real estate. Property conditions and other issues can be fixed. Investing in a property that is located in a bad neighborhood will probably lead to failure. When looking to purchase real estate, always make sure you investigate the area and its property value.
See if there are all of the stores and schools that you’ll need around the real estate that you’re thinking of getting if is for your family. You don’t want to move to an area where you’re not near anywhere that you need to go to. It would cost you a lot in traveling expenses, so keep that in mind when you move anywhere.
How does it feel knowing you’re getting serious about investing in real estate? Of course, make the investment decisions that are right for you, and always be aware of the risk and reward. You are going to do just fine.
How To Start Investing in Real Estate
If you choose to invest in real estate, follow these steps to get started:
Save money: Real estate has some of the most expensive barriers to entry of any of the asset classes. Before you get started, you’ll want to pay off your high-interest debt and have significant savings.
Choose a strategy: Each of the strategies listed above can be successful. If you choose to buy REITs or funds, you can use internet websites to help you get started. If you want to buy physical property, you’ll need to decide on a market.
Assemble a team: You may want to work with an agent when you get started. Great agents will send you off-book opportunities that haven’t been listed yet. Eventually, you could need someone to manage your properties and an accountant to handle the financials. If you become successful, you may eventually need investors, too.
Do deal analysis: Whether you’re investing in residential or commercial real estate, you should do plenty of research on any investment. For example, with rental properties, you’ll need to analyze what future rent payments could be, what expenses you may be liable for, and forecast what you could sell the property for.
What To Consider When Buying Real Estate
Once you have a property in mind, compare the income you expect to your outgoing expenses. If there is a shortfall, consider whether you can cover it long-term. Also, work out whether you could cover all expenses short-term if you had no tenants for a while.
Research the property market to decide how to get an investment property. Where and what you buy will affect your return on investment.
Where to buy
-Areas you’re familiar with will take time to research.
-Look for areas with high growth, higher rental yield and low vacancy rates.
-Find out about proposed planning changes in the suburb that may affect future property prices.
What to buy
Look for properties with appealing features like a second bathroom, a garage and access to schools, shops and transport.
Consider maintenance costs based on property type, age and features.
How to buy
Be wary of property investment advice from groups of service providers. Property developers, accountants, lawyers and mortgage brokers might recommend each other’s services.
Important: You may have heard of property investment seminars promising to make you a fortune. These events often use high-pressure sales tactics to rush you into making big property investment decisions. Find out how to spot the warning signs of a dodgy investment seminar.
The bottom line
Real estate investing can seem intimidating at first. Not everyone has the time or ability to flip houses or handle having a tenant.
The good news is there are options available for every level of investor, with each catering to different goals, skill levels, and time constraints. The most important thing to do is get started today and let your investment start compounding now.
What To Look For In Rental Properties
Rental properties that prove effective in the long term should meet three key criteria. First, it has excellent returns. Second, it is effective when it comes to taxes. Third, it has growth potential, nothing extraordinary, but just enough to ensure that it continually develops.
To find an investment property that meets these criteria ensure that the property you choose has all the following characteristics:
A reliable investment property is located in an established area that is not likely to suffer greatly when economic problems arise. Properties situated in the proximity of developing suburbs, which are normally gradually absorbed in the city, are frequently a solid investment.
It’s important to note that knowing the prices asked for properties in the chosen suburb and monitoring them over a period of time significantly reduces risks. In terms of value, properties that are at both ends of the spectrum, i.e. those which are expensive and those which are cheap, are not usually safe investments.
Median-priced properties are more reliable in the long run because they have more appeal for all tenants.
The property you choose to invest in should not be located on the main road, not should it be too far from one. The ideal placement is two streets from a principal road. Properties that are close to schools and shopping centres also have an advantage, though they should not face those establishments.
Right Type For Your Budget
The decision of whether to invest in a unit or a house is entirely personal and depends on the budget and aims you have. Starters usually go for units because they are cheaper and easier to manage. It’s important to remember that in time the value of a building can only depreciate. By contrast, the land on which it lies can only increase in worth.
When planning to buy a unit there are two rules you should remember. First, don’t purchase a unit that is in a complex that has a lift or swimming pool because of higher strata levies. Second, don’t get a unit in a large complex. Not only do large complexes tend to be in poorer condition than smaller ones, but also they often feel uncomfortably crowded.
Accessible Starting Rental Price
Properties that allow you to ask for a high rental price are not necessarily those which bring the most money. Before an investment in a property can be profitable the unit or house you let must have a tenant. Depending on the placement of the property, finding quickly a tenant may be a problem, even if your offer is advantageous.
In short, the lower your investment, the lesser your risks. It follows that knowing about the vacancy rates in the area helps tremendously. A deluge of new properties to be available soon is often a sign that vacancy rates may rise.
To minimize your risks when investing in property ensure that the property you purchase is adequately located, in good condition, and affordable. Also, don’t forget to tailor your plans according to your investment assets. To be on the safe side, start small.
Is the Income Property Well Priced? How to Evaluate the Market
Once an income property has been located that you might like to research further as a potential investment opportunity, there are a couple of questions you want answered to help you determine whether the property is well priced or under priced.
So here are ways you can make that evaluation:
Broadly speaking, when you’re considering a rental property investment you want to know (1) what the local supply and demand trends are for rental properties, (2) whether the local market would classify as a buyer’s or seller’s market, and (3) what the current trends are and what do they suggest for the future.
In this case, you can certainly discuss market conditions with a real estate professional that specializes in income property and understands the local rental market. Or, if you don’t mind rolling up your sleeves and prefer to do your own research, then you can turn to resources where you might get the statistics we address here like local lenders and the local real estate websites.
So let’s assume that you prefer to do the research on your own. Here are the calculations for three commonly used indicators that will help you to evaluate the real estate activity in your local market and perhaps give you a clue about prices:
The Supply and Demand Calculation
The object here is to arrive at the number of months of rental property inventory currently available. For our purposes, of course, since we are addressing real estate investors, we limit our examples to include investment real estate such as apartment complexes and commercial buildings only. But you can also use this technique for single-family houses.
Began by counting the number of income properties (whether apartments or commercial) currently for sale to determine the inventory. Next, determine the average number of properties that are sold each month. Finally, divide the inventory by the average number of sales per month to arrive at the number of months of rental property inventory currently on the market.
For example, if there are five apartment properties for sale and one apartment building sells every five months then there are five months of apartment housing inventory.
The Spread Calculation
The spread results in a percentage that is intended to show the difference between what price a property was listed for and what price it actually sold for. This is calculated by first determining the difference between the asked price and sale price, then dividing that number by the original asking price.
For example, if a commercial office building was listed for $1,500,000 and sold for $1,400,000 the spread would be 6.7% (the difference of $100,000 divided by $1,500,000).
The Time on the Market Calculation
The length of time that a particular type of investment property sits on the market is another worthwhile indicator. In this case, you want to determine the number of days that it took from the time a property was listed until the time that it finally sold.
The formula is straight forward: simply deduct the listing date from the sale date. For example, if a property that sold on July 1 was listed on January 1, the time it was on the market would be 181 days.
Okay, in all, pretty lightweight stuff by real estate analysis standards. Still, when done correctly the combination of all three does provide real estate investors with an idea about activity trends in the area and can help expose over priced properties. Just be sure to always restrict the study to the specific type of property under analysis.
Types Of Real Estate Investment
Real estate investing is satisfying and lucrative, when done right. It can help you diversify your investment portfolio as well as generate extra income. Many of the real estate investments don’t require you to deal directly with tenants.
Also, you can purchase a property by paying only a fraction of the total price and then clearing the balance and interest over time.
Here are four real estate investing options:
Investing in residential rental properties can be great, especially for individuals with the renovation and DIY skills, and have the fortitude to deal with tenants.
• Provides regular income
• Properties can appreciate
• You can optimize capital through leverage
• Many of the expenses are tax-deductable
• Managing tenants can be tedious
• Vacancies can reduce income
• Tenants can damage property
You can purchase underpriced properties that need a bit of an upgrade, renovate them inexpensively and then resell them at a profit. House flipping, however, comes with some risks.
First, your estimate of repair costs must be precise, which is not a simple thing to do. Second, the longer the property is in your hands the less money you’re likely to make because you’ll be paying a mortgage without it generating income.
• Ties your capital only in the short term
• Potential quick returns
• A hot market may cool unexpectedly
• Requires deep industry knowledge
Real Estate Investment Trusts (REITs)
REIT investment trusts are traded in major exchanges, similar to stocks. A REIT comes into being when a trust/corporation uses investors’ money to buy and manage income-generating properties.
REITs can enable you to invest in nonresidential properties, like office blocks and malls that you may not be capable of purchasing directly.
• Highly liquid because they can be traded
• They are in essence dividend-paying stocks
• The holdings are typically cash-producing long-term leases
• Doesn’t offer the leverage that’s usually available in traditional rental property investing
These online platforms link investors with developers who need capital for their real estate projects, either through equity or debt.
• You have the option of investing in a single project or a diverse range of projects
• Geographic diversification
• Typically illiquid and speculative
• Management fees
The four real estate investment options available to investors include rental properties, house flipping, REITS, and online platforms. Ultimately, the ideal real estate investment opportunities are those that align with your investment goals.
Investing in Real Estate Pros and Cons
Less volatility – Property can be less volatile than shares or other investments.
Income – You earn rental income if the property is tenanted.
Capital growth – If your property increases in value, you will benefit from a capital gain when you sell.
Tax deductions – You can offset most property expenses against rental income, including interest on any loan used to buy the property.
Physical asset – You are investing in something you can see and touch.
No specialised knowledge required – Unlike some complex investments, you don’t need any particular specialised knowledge to invest in property.
Cost – Rental income may not cover your mortgage payments and other expenses.
Interest rates – A rise in interest rates will mean higher repayments and lower disposable income.
Vacancy – There may be times when you have to cover the costs yourself if you don’t have a tenant.
Inflexible – You can’t sell off a bedroom if you need to access some cash in a hurry.
Loss of value – If the property value goes down you could end up owing more than the property is worth.
High entry and exit costs – Expenses such as stamp duty, legal fees and real estate agent’s fees.
Investing in Real Estate When The Market Is Down
Here are the main points:
*Don’t stop. Historically, real estate always works, you simply need to adapt to market changes
*Learn about and secure funding
*Stay involved in online networking groups, both local and national to stay abreast of changes you need to be aware of as they happen
There are fewer investors buying in a bad market because of fear of the future and lack of funding, so there will never be a better time to be in the market in years!
Get educated. As the business becomes more difficult, those who are prepared, informed, and educated have an incredible opportunity.
Buy for less. You know the future holds uncertainty. Price values may drop greatly in the coming months or years. Sellers know that, too, which is why many will want to sell sooner rather than later.
They also realize that you’re taking on their risk when you buy, so they understand when you offer less than they hope for. And, it’s true, you are taking on a risk. Make sure when you make an offer that it’s a price you can live with if the value drops over the next 3-6 months.
So buy properties you can turn quickly, this is not a time to buy large rehabs!
Prepare for longer days on the market when selling. Watch your local property days-on-market to have an idea of what to expect. As lenders begin to dry up and/or increase their borrowing requirements, there will be fewer qualified buyers and both selling and closings will take longer.
Expect lenders to tighten borrowing requirements.
Private lenders stop lending due to fear of future risk and a need to keep their funds secure for themselves.
Banks may stop offering loans, which means they’re already concerned and responding. Pretty much anyone lending will begin requiring that the borrower has more funds on hand, a higher credit score, and is a stronger applicant all the way around. Plus, they may increase points and interest rates.
Higher priced properties will be the first to slow, so focus on the properties that are below your area’s median price point (and know what that price point is!).
Expect this “event” to last for a while – possibly years. In previous bad times, the common response was that the worst was over and things were going to start getting better. “Things”, however, continued to get worse.
Remember, in a bad market the “new reality” and what’s coming after that is hard to predict. Stay aware, stay flexible, stay informed, stay in touch with other investors. There’s always money to be made in real estate.
Real Estate Investment Tips
Diversify your investments
Invest in more than just property so your money isn’t all in one market. If you invest in one market, it’ll increase your risk and means your portfolio isn’t diversified.
Costs of investing in property
Buying, managing and selling an investment property can be costly and will affect your overall return.
Some of the costs involved to buy and sell a property include:
-Pest and building reports
If you sell your property, you will have to pay agent’s fees, advertising costs and legal fees. You may also have to pay capital gains tax if the property has increased in value.
Ongoing costs of investment properties include:
-Council and water rates
-Body corporate fees
-Property management fees (if you use an agent)
-Repairs and maintenance costs
Borrowing Money to Buy
If you borrow to invest, you will have to pay the property mortgage. Don’t rely on rental income to cover the mortgage, there may be times when your property is empty.
Many people buy investment property with interest-only loans, but remember the interest-only period will end after a certain time. This means your repayments will increase to pay the amount borrowed, plus the interest.
See what an interest-only loan will cost you with an interest-only mortgage calculator.
Invest in Landlord Insurance
Protect your new investment; In addition to homeowners insurance, rental property owners should always purchase landlord insurance. This type of insurance generally covers property damage, lost rental income, and liability protection, in case a tenant or a visitor suffers an injury as a result of property maintenance issues.
Keep in mind that standard homeowners insurance policies may not cover losses incurred while the home is rented out. Contact your insurance agent to make sure you are adequately insured.
To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowners insurance policy.
Factor in Unexpected Costs
It’s not just maintenance and upkeep costs that will eat into your rental income. There’s always the potential for an emergency to crop up—roof damage from a cyclone, for instance, or burst pipes that destroy a kitchen floor. Plan to set aside 20% to 30% of your rental income for these types of costs so you have a fund to pay for timely repairs.
Avoid a Fix and Flip
It’s tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first property, that’s probably a bad idea. Unless you have a contractor who does quality work on the cheap or you’re skilled at large-scale home improvements, you likely would pay too much to renovate. Instead, look for a home that is priced below the market and needs only minor repairs.
Calculate Operating Expenses
Operating expenses on your new property will be between 35% and 80% of your gross operating income. If you charge $1,500 for rent and your expenses come in at $600 per month, you’re at 40% for operating expenses. For an even easier calculation, use the 50% rule. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses.
Determine Your Return
For every dollar that you invest, what is your return on that dollar? Stocks may offer a 7.5% cash-on-cash return, while bonds may pay 4.5%. A 6% return in your first year as a landlord is considered healthy, especially because that number should rise over time.
Tax on your investment property
Although you may be able to claim tax deductions on expenses, you’ll still have to pay tax on your rental income for positively geared investments.
Investing in rental property can be lucrative, but it can come with many challenges.
Borrowers usually need to secure at least a 20% down payment for a rental property mortgage.
Being a landlord requires a broad array of skills, from understanding basic tenant law to fixing a leaky faucet.
Experts recommend having a financial cushion in case you don’t rent out the property, or if the rental income doesn’t cover the mortgage.
Although rental income is passive, tenants can be a pain to deal with unless you use a property management company.
Rental income may not cover your total mortgage payment.
Unlike stocks, you can’t instantly sell real estate if the markets go sour or you need cash.
Entry and exit costs can be high.
If you don’t have a tenant, you still need to pay all the expenses.
The Bottom Line
Be realistic in your expectations. As with any investment, rental property isn’t going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake.
Still, rental properties can be a lucrative way to invest in real estate. For your first rental property, consider working with an experienced partner. Or, rent out your own home for a period to test your proclivity for being a landlord.
Investors Basic Principles About Owning a Block of Units
Although historically owning a block of units is considered a quality, relatively safe investment, it takes some knowledge understanding, planning, and carefully choosing the right property to do so.
Investing in Units – Furnished or Unfurnished
If you are a block of units investor, choosing the route of furnished or unfurnished units is a very important decision. You have to select what is going to maximize your income and protect the over all investment in your building. This is not an easy choice, so I’m going to give you the pros and cons of furnished and unfurnished rentals.
Of course, the easy and simple thing to do when you invest in a block of units building is to rent the units unfurnished. For most, this is a good steady income with no worries of furniture or wear and tear on items you purchased.
Some tenants like to settle into rentals for years and all you have to do is provide the occasional maintenance tasks, fix minor plumbing issues, broken windows and items like that. Some tenants prefer shorter rental terms, which means you have to refresh the units with paint and other maintenance to keep the units looking fresh for the next tenant.
Over all there are far fewer things to think about when renting unfurnished units as compared to furnished ones; the leasing term and maintenance being the major considerations.
The property location, style, and up-keep of your building will determine the type of renters you attract so this is an important consideration in determining whether you should rent furnished or unfurnished apartments.
With a short-term tenant, a month-to-month lease in a furnished unit is often very attractive. For example, military service people are usually stationed for short terms and don’t like having to haul furniture from duty tour to duty tour.
Also, consider traveling businessmen and travel nurses who work on short-term assignments. These are perfect tenants for furnished units and these great tenants cause minimal damage because their companies often lease the apartments for them so they have extra inventive to be gracious tenants.
Some municipalities allow you to split units into separate rooms to create shared units. Units with shared common areas have huge profit potential. A furnished room is very convenient to renters who want to travel light or who want to maximize their income by sharing expenses with others.
Since many people travel on assignment and have other homes, they mainly care about working and having a safe place to sleep at night. We don’t want to assume all short-term renters seeking furnished units are the drifter types.
Tenants that rent a furnished unit are usually willing to pay a little more, first because they are getting more for their rent. Secondly, most will already have a full set of furniture elsewhere and simply don’t want to have to move their items that are in storage.
Since they’re utilizing your furnishings they are accepting the responsibility to care for them and pay a security deposit to cover any damages. Overall, as the landlord, you have a higher class of tenants.
The decision to rent furnished or unfurnished apartments greatly impacts the type of tenants you can attract. If you prefer to attract higher priced tenants looking for shorter term leases then furnished rentals are the way to go.
If you prefer long-term renters who like to nest for a year or more then an empty clean well-maintained apartment is the right choice. In the end, the decision should be based on what is the most profitable situation for you, the investor.
When to Hire a Property Manager
Rental property owners can manage the property themselves or hire a property manager. It can be a hard decision to make because property managers typically charge between 8% and 12% of collected rents, which can really eat into profits.
Still, hiring an experienced property manager can be well worth the cost. After all, it means less work and fewer headaches for you, as you take advantage of their industry expertise.
In general, a property manager will:
-Know how to market the property
-Understand the local rental market and ensure you price the rental accordingly
-Show the property to potential tenants (so you don’t have to)
-Screen tenants (for example, conduct credit checks and verify references)
-Collect rent on your behalf and deposit the money into your bank account
-Handle late rents and navigate the eviction process
-Handle tenant complaints
-Arrange maintenance and repair work
To decide if hiring a property manager makes financial sense for you, ask yourself these questions:
Do I have time to manage the property myself?
If you have another full-time job, you likely won’t have the time or energy to manage a property on your own. This is especially true if you own multiple properties.
How close is the rental property to my home?
Being far away from the rental takes more time out of your day and makes it more difficult to manage routine and urgent issues.
Am I willing to deal with tenants?
Even if you do a good job of screening, it’s likely you’ll have to deal with unreasonable tenants, late rents, and evictions at some point. Is that something you’re willing to do?
Is my rental property for short-term or long-term tenants?
It might be easier to self-manage if you are looking for long-term renters. But if it’s a short-term rental (for example, an Airbnb), you will be dealing with many different tenants—and potentially a lot of complaints and maintenance issues.
Do you need to be in control?
If you have a hard time handing over responsibilities such as choosing tenants and performing maintenance tasks, you may be better off managing the property yourself.