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Buying your first investment property can be a bold step to a more prosperous and secure future. But it can also pose risks. The Successful Investor’s Michael Sloan outlines five strategies to help you take the right path.
Give me the main points
- Most investors use equity from their home for their deposit – but leave yourself wriggle room.
- Hire a quantity surveyor to work out a depreciation schedule for your property.
- Understand the difference between positive cash flow and negative gearing.
- Do your research. Then do some more.
- House or apartment? No right or wrong answer here – just more homework!
Buying your first investment property can be exhilarating (if a little stressful). When done well, property investing can create long-term wealth for you and your family.
Here are five strategies to consider when you’re starting out. Tactics to help you avoid the mistakes so many novice investors make. Read on!
My 5 Essential Investment Property Tips
Most people use equity from their home to help buy their first investment property. They then use the equity from both their home and investment property to buy their next property. This makes owning a portfolio of properties easier over time.
For this strategy to work, it’s important to understand how equity works and get an idea where you stand. It’s also important not to over-extend yourself. It’s risky—and ill-advised—to max out your equity if it leaves you in a financially vulnerable position (i.e. with no ‘buffer’ in an emergency).
Generous tax breaks—including depreciation—ensure your investment property is mostly paid for by the tenant and tax savings. To maximise your potential tax deductions—and savings—engage a professional quantity surveyor to give you a depreciation schedule. It’s not a job for your accountant.
3. Negative gearing and positive cash flow
Negative gearing means you pay money towards the property each year since the cost of the property exceeds the income of the property. Positive cash flow, on the other hand, sees you make money from the property each year (i.e. total expenditure—taking into account all costs—is less than total income, including tax breaks). Not knowing how much a property will cost you each week before you buy is a mistake many property investors make.
Make sure you understand how negative gearing works. It’s the most popular way to start investing in property, but you must be able to ‘top up’ funds each month towards the property. In time, each property will become positive cash flow and you won’t have to contribute additional funds.
4. Investment property research
It’s important to get the basics of property investing right. Happily, if you do your research it’s hard to go too far wrong. Always buy in sought-after locations, close to public transport with easy access to decent schools and amenities. This means you should find good tenants without difficulty.
Also don’t make the mistake of only looking in the suburb where you live (or imagine you might want to live). You can buy anywhere in Australia, so don’t restrict yourself to the house around the corner.
It’s also wise to diversify your portfolio. Once you buy in one location, it can be tempting to buy again in the same place. However, that approach concentrates your risk—it’s best to diversify.
5. A house or an apartment?
This is a whole topic all by itself—and one without a straightforward answer. Both can perform well for you. It’s important to buy what suits your budget and cash flow, and the type of property that’s popular in its area.
A single-fronted terrace in inner-city Melbourne may be great for capital growth, but it can cost you $300 a week after tax. Cash flow demands like this get people into financial trouble, and it’s out of reach for the average Aussie investor. Only buy what you can afford. This will not only help keep you safe, but may mean you can buy more properties in the future.
The information in this article has been written by Michael Sloan from The Successful Investor. While Mr Sloan has been careful to ensure the information is correct and accurate, Mr Sloan’s views are his own and do not necessarily represent those of National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence 230686 (NAB). This information should not be relied upon as financial product advice as none of the information provided takes into account your personal objectives, financial situation or needs. NAB recommends seek the counsel of an independent financial advisor before making any investment decision.