Many people become a property investor to open a new investment stream, but it can be a full time job.
Owning property requires work and time and there can be a lot of responsibilities, rules and costs.
So why should you invest in property if it presents such headaches? Well, the answer is simple. The benefits will usually outweigh the risks; you can go it alone, it’s a pretty safe bet as opposed to highly volatile stocks or crypto, and it’s an excellent way to generate long-term wealth.
Plus, the emotional rewards can be just as beneficial as the financial ones.
Preparing a solid game plan will ensure that you know what you are getting yourself into when you become a property investor. You’ll be more likely to enjoy the experience and being prepared means you can move quickly to nab a good deal. Before you know it, you’re a landlord. Here are some steps to consider before you get started.
1. Know your numbers
Running your numbers will give you a good idea of what type of property you can afford, which areas you might like to invest in, and what you need to cancel out when you’re scoping the market.
What can you afford right now, in one year, in five years? How much will the bank lend out to you? Do you need to reel in how much you’re spending on the likes of Uber Eats or Afterpay?
Mapping out a financial pathway can help you tighten up your budget. You can then create a more accurate projection of the kind of income you’ll need to generate to service a loan and still live comfortably.
As well as this, get across the extra costs involved to buy a property like stamp duty, conveyancing fees and borrowing costs. It will give you a better idea of how best to budget.
2. Know the rules
Understanding what is required of a landlord, and building a solid foundation is critical if you want to become a property investor.
Being familiar with terminology and understanding how it applies to you is paramount. Terms like security deposit, rental income, mortgage payment, property taxes and lease agreement will come up. It’s important to wrap your head around them.
Depending on which state you want to invest in, familiarise yourself with the legislation that dictates your rights and responsibilities as a landlord. These rules are governed on a state by state level. This means that if you’re investing in multiple cities, you’ll need to comply with the laws in each relevant jurisdiction. You can find a state-by-state guide here.
3. Choose your investment criteria
Be sure to look before you leap and head into your venture with realistic expectations. Generally speaking, domestic housing and units are more simple to understand for a first time property investor.
It’s worth looking for properties with appealing features. This could be a second bathroom, a garage, access to schools, shops and transport. Also consider if you are buying to renovate and add value to the property, or if you want tenants to move straight in.
In terms of location, you want to look for areas with high growth, higher rental yield and low vacancy rates. But take your time researching this, and make sure you are aware of any proposed planning changes in the area that could affect future property prices.
4. Decide how to finance your new investment
If you are in no hurry to become a property investor there will be more time to snag a great bargain. Keep an eye on market conditions and watch out for hype-driven buying periods. While these market surges may be great for landlords looking to sell, you ideally want to start your investment journey in a buyer’s market (when property sales aren’t at their peak). The cheaper the property versus its market value, the more chance you have of making money from it.
Investment loans can be tools for investors to maximise their returns depending on the terms of the loan. Keep in mind, while you will earn your income through rent, you will need to pay interest and the costs to own the property. So ideally you want your rental income to exceed mortgage repayments.
5. Find the right tenants – you can DIY this
There is a fine line between protecting your investment and a vacant property. If you practice patience and persistence, you will find the right tenant for your property and it will pay off in the long run.
Advertising for tenants is not as complicated as it may seem and you can definitely do it yourself. The internet provides the most efficient and inexpensive way to find prospective tenants. Using a site like RentBetter will provide you with a cost effective way to find tenants and set-up your lease in the right way.
Reaching out to friends and family can be another great way to secure a tenant. That way you’ll likely lease to someone who has a second or third degree of connection to your network. You’d be surprised how effective word of mouth can be!
Before signing a lease, you may want to do a quick credit check or reference check to ensure you can trust the people who will be living in your investment. Third-party providers like Equifax’s Tenancy Check platform may help, or you can call prospective tenant’s references yourself.
6. Manage the property
Once you become a property investor, you can either outsource the management of your property, or take control of it yourself.
As a DIY landlord you’ll need to make sure you are pragmatic and fairly unemotional when dealing with tenant issues. Keep in mind this is your investment, not your own home or a bed and breakfast.
You will need to carry out things like collecting and tracking rent, conducting routine inspections and making arrangements for repairs and maintenance. These things are all simple if you have a good relationship with your tenant, or use the right systems to manage these processes.
Platforms like RentBetter can centralise all of these functions for you, as well as provide the reporting required for tax time. If you don’t want much oversight over investment property, you may also consider handing over control to a property manager.
If you can crunch the numbers and manage the responsibility, property investment is a nest-egg no-brainer for many Australians.