Investing in property has usually been considered an excellent way to build and hold wealth, as long as an investor chooses the right property.
Any investment specialist will tell you that a strategic investment should be the only investment you make. You will need to plan out every step and consider the consequences of all the actions you take to minimise the risk of your property investments.
Consider suburbs that offer a wide range of opportunities to investors who can see potential in the following;
- Infrastructure projects in the area
- An industrial powerhouse and an emerging global energy centre
- A flourishing tourism sector
- The State Government is dedicated to growth
Tim Lawless talks about the Australian housing market for July 2016
Tips to find the best investment suburb
If you keep the following tips in mind when looking for an investment, you may significantly increase your chances of making a profitable investment.
Select a property tenants will like
The easier it is to rent a property, the more certain your income stream could be, which is why you have to make sure you pick an investment property that is attractive to potential tenants. Thus, you may want to consider a property with decent-sized rooms – no shoebox bedrooms, that is clean and isn't too close to any main roads, which could lead to unbearable noise levels. Also, don't forget about parking. If the property comes with a driveway or any other off-street parking solution, it could be a lot easier to rent out.
Make sure to get a good feel for the area and what type of people rent properties there. This could give you an advantage in being able to select a property that will meet their requirements, which could increase the chances of you finding tenants easily and getting a decent rent.
Find a property that will generate capital gains
There are certain things to look for that will increase the chances of a property increasing in value, such as its proximity to public transport, leisure facilities, schools and beaches. The closer it is to such amenities and the closer the property is to the central business district, the more likely it is to increase in value by the average rate, at the very least, in a strong market and the higher the chances of it maintaining its value in a down market.
You may also try to find a property that is being sold around the median price, as it may make it easier to rent or sell, if you have to do it urgently. This way you can at least break even or even make a profit – depending on how long you held the property for and the property could sell much quicker.
Invest in Blue-chip properties
Blue-chip properties are those units that perform well under any market conditions, whether the economy is experiencing growth or is in a slump. Thus, you want to look for properties that are in high demand, even if it means paying the market value and purchasing in one of the top suburbs. More often than not, a property is cheap because no one wants it, so it's better to spend more on a property that could be easy to rent because people want it, rather than on something there is little to no demand for.
Example: Property growth in Darwin
Build equity right away
You can build some equity in your new property right away with a few small and quick renovations, such as a paint job, or by replacing the carpeting, cleaning up the garden, installing new blinds and fixing up the kitchen. The goal should be to get a 100% - 200% return in equity on every dollar you spend for renovations.
Refinance to create a buffer for emergencies
Life happens and no matter how much you want to avoid thinking of the possibility, something might happen that would force you to sell the property off quickly. This could come with serious consequences such as being forced to sell the property under market value or having to pay capital gains taxes and other expenses. This is why you may consider refinancing the property once you've built up some equity, so you can have an emergency fund available, which can be used to pay the mortgage in vacancy periods or if you lose your income.
A professional property manager is a must because they can make sure the tenants are reliable. Not only that, but they are in a better position to find tenants who will pay a good rent, on par with the market. It's also a good idea to sign agreements spanning 12 months with your tenants, which could help ensure that you are earning rental income for the duration and give you less to worry about.
What types of loans are available for Investment Suburbs?
You'll be glad to know that there are plenty of options available in terms of the types of loans you can secure to purchase a property. Below you will find the types of loans available from lenders geared towards investors.
Most lenders offer an extensive range of products geared towards investors. Some lenders will lump investment loans in with their standard loans while others offer them as a separate category.
The advantage to taking out an interest-only investment loan is that you can obtain some significant tax deductions as well as improving your cash flow by minimising your outgoings. Additionally, interest rates have gone down quite a lot over the past few years, making investment loans as competitive as home loans.
When taking out an investment loan, don't let yourself be blinded by all the features because some of them come with a hefty fee. Make sure you really need that feature and that you won't be paying for it for nothing.
With fixed rate loans, you will be paying a particular interest rate that has been determined prior to signing the contract, for a set period of time, such as three years. Within this timeframe, the rate will not change, which means that you will be paying the same amount every month for the duration, making it easy to set up a budget for the long term.
The problem with fixed rate loans is that if rates drop, you will still be paying the interest rate. Other drawbacks include not being able to redraw money at a later date as well as the inability to make higher repayments to pay the loan off sooner. Note that some do come with this facility, but you will incur some hefty penalties, which also apply if you want to close the loan early, during the fixed rate period.
Variable rate loans generally come with attractive interest rates and offer borrowers a wide range of features, depending on their needs. The rate of the loan changes according the how the Reserve Bank of Australia's cash rate fluctuates.
The advantage with this type of loan is that if rates fall, then you will be paying less every month. Additionally, variable rate loans come with more competitive rates than fixed rate loans. The former also offer more facilities, including additional repayments with no penalties (in most cases) and the possibility of redrawing from the loan at a later date if you need to.
Of course, there are drawbacks as well. If rates go up, then your repayments will increase as well. Some variable rate loans offer really low rates but come with few facilities. And if you want to switch from variable to fixed or vice versa, make sure you check out the costs involved because it may not be worth it in the long run.
A line of credit allows you to take advantage of the equity in your home, giving you access to additional cash. Since property values have gone up quite a bit over the past 5 years in Australia, these loans are becoming increasingly popular.
The advantage of a line of credit is that it is flexible in terms of repayments, meaning that you can decide on how much you pay back and when. If you set it up so that your income is paid directly into the account, then you will be able to save quite a bit of money on interest charges. However, these loans don't come cheap, so make sure it's the right option for you and it's worth the higher fees and rates.
Low doc loans target self-employed Australians who cannot provide income and savings histories. These loans are the result of the banking industry finally realising that an increasing number of Australians are self-employed with an irregular income and are unable to provide all the financial documentation required for standard loans.
Thus, they have the option of taking out a low doc loan, which requires much less documentation, though the loan to value ratio (LVR) is usually lower than on a standard loan. Additionally, low doc loans also feature higher interest rates because lenders feel that people who are self-employed pose a higher level of risk.
No doc loans require even less documentation than low doc loans. In fact, a signed statement from you stating that your business has sufficient income to service the loan is all that most lenders will require. This is a great way to get a loan without disclosing how much you make. However, just because a lender will give you the money, doesn't mean you should take it without being certain you can easily make the repayments.
Equity release loans are relatively new to Australia and target people who are over 65 and include reverse mortgages and appreciation mortgages. A reverse mortgage will allow you to take advantage of the equity in your property to provide you with funds for your retirement. You won't have to make any payments since interest charges are capitalised onto the loan.
These loans allow you to live comfortably in your retirement while still retaining ownership of the property. However, if you end up withdrawing more cash than the property's equity is worth, the bank could take your home so make sure to get independent financial advice if you are considering taking out such a loan.
What banks offer investment loans?
The type of investment loan you opt for will depend on what you wish to accomplish. You can either take out a very simple loan, similar to a regular home loan, or you can opt for something a little more complex with a variety of features, including redraws, offset accounts and additional payments. More complex loans could also help you capitalise on tax benefits, gearing and repayments.
Why should you invest in property?
Property investment is still considered one of the most effective ways to build and maintain wealth. It certainly offers better returns than keeping your money in a savings account.
Investing in a property also allows you to build wealth if you don't have that much cash on hand. This is because you can borrow money from the bank and use it to invest. The best thing is that the interest costs are tax deductible if the property is negatively geared, i.e. the net rental income doesn't cover the interest costs and other expenses involved in owning and managing the asset.
Things you need to know about investing in property
If you feel that property investment is for you, there is one important factor that you must remember when choosing an investment property and that is that it's somewhat different to selecting a property you wish to live in.
Below are some issues you should take into account;
Purchase a property that suits your investment strategy. For example, are you aiming for negative gearing or is your investment strategy aimed at generating a positive cash flow?
You need to be fully aware of all the costs involved, such as stamp duty, council and water rates, real estate commissions, strata levies and so on.
To protect yourself against the worst, you should think about taking out a landlord home and contents insurance property.
Draw up a good plan in terms of your tenants. Thus, make sure to sign them to a lease with a suitable duration and also make sure you have enough money set aside to cover the loan repayments if the property remains vacant for a while.
Pick a suitable loan. You might opt for an interest-only loan because you will have lower repayments, which could help with your cashflow.
Always stay abreast of what is going on in the market and what the latest property trends are.
10 Tips for your Investment
- Do your research.
- You are going to be spending a lot of money, so you should make sure you cover all your bases. There's no reason to take needless risks because you didn't take the time to research. Sites like RP Data or Residex can provide all the data you need to enter the investment market wisely.
- Make sure your finances are in order.
- Have a word with your mortgage broker before you start visiting real estate websites or going to open homes, because the best time to purchase an investment property is when you've sorted out your finances.
- Purchase a property where there is a high rental demand.
- Properties in the vicinity of people's places of work, leisure facilities, public transport and beaches within the $550,000 - $800,000 range make affordable rental options for most people who have a full-time job. Thus, any suburb close to a central business district, which has leisure facilities relatively close by is a suburb where any working professional will want to reside, which makes it ideal for investors since it could be easy to lease.
- Plan for a long-term investment.
- Don't try to predict the next housing boom because, as an investor, you should be planning for the long-term. Otherwise, you stand a good chance of missing out on all the benefits. You're much better off looking for good quality properties that are always in demand rather than hoping to make a killing overnight.
- The first thing you should do is to establish your investment strategy. In other words, what are your investment goals? Do you hope to retire sooner? Do you want to increase your retirement income? Are you looking to replace your current income? Do you simply want to earn more money now?
- Is your goal to purchase a property that will offer you capital gains or are you looking for a good rental yield? What you wish to accomplish will help you create an investment strategy and make it easier to select the right type of property.
CommBank have done the hard work for you and have crunched the numbers from RP Data to see what suburbs have an average positive cash flow. The numbers are based on the median rental rate within the suburb and the median sale price along with assumptions of maintenance costs.
New South Wales
- Ultimo - an inner city market dominated by units and generally receives strong rental demand.
- Haymarket - directly on the edge of Sydney CBD and includes Chinatown. Receives strong demand for its abundant amenity.
- Rushcutters Bay - three kilometers from Sydney CBD, this location receives demand as it dominated by units close to a waterfront location, and close to the nightlife of Kings Cross
- Carlton - inner city suburb about two kilometres away from Melbourne CBD. Receives strong demand for university accommodation and units as it is close to the University of Melbourne.
- Heathcote - approximately 40 kilometres from Bendigo City and has major supermarket facilities.
- Yallourn North - located 9 kilometres east of Moe. A small town and benefits from the abundance of nearby facilities within Moe.
- Dysart - a mining town located in Central Queensland. A significant increase in demand for coal as seen demand for workers and accommodation.
- Moranbah - this is another mining town where it serves as service centre for nearby coal mines.
- Dolphin Heads - situated in Central Queensland, the suburb receives significant demand from families of works in the nearby mining towns.
- Risdon - located about 198 kilometres north of Adelaide, it is close to the world's largest smelter.
- Evanston - situated approximately 33 kilometres north of Adelaide CBD, it acts a service area for the surrounding agricultural area.
- South Hedland - within the town of Port Hedland, it is near Australia's highest tonnage port with a huge demand for housing, due to the surge in the demand for resources in the region.
- Dampier - part of a major mining and resource port city. It exports petrochemical, salt, iron ore and gas.
- Rosebery - approximately 191 kilometres from Hobart and is heavily reliant on the mining sector.
- Gagebrook - located approximately 16 kilometres north of Hobart CBD, the suburb has affordable housing creating more demand.
- Queenstown - located about 171 kilometres from Hobart, it is a popular tourist destination and has many mining operations
Australian Capital Territory
- Griffith - about 5 kilometres from the city centre, it is an excellent location with an abundance of local and retail amenities.