Investing In Property Is A Numbers Game
Property investing is the favourite way for Aussies to create wealth and secure our future. We do this mainly through the income generated from rent and the capital growth when we sell the property.
But we need to make sure we get it right. The property has to represent good value, it needs to be in a location that has high rental demand and forecast strong capital growth.
So how do we make sure we “get it right”?
We run the numbers. And there are a whole lot of numbers that are important when you’re investing in property.
Let’s go through them…
1. Your goal. What’s your driver for becoming a property investor? Do you have a figure in mind for retirement? Do you have a target for wealth creation or tax minimisation? Are you aiming to create passive income for your retirement? Will you be aiming to positively or negatively gear your investment? Are you aiming for minimal cost of holding the property and then to make more money when you sell? Your investing strategy will determine these factors.
2. Your investment. How much can you spend and how will you fund it? Do you have a deposit or will you be leveraging the equity in your home? What are the legal fees and stamp duty? How will you be paying those?
3. Your financial position. What do you earn, what do you own and what do you owe? This is a great way to assess your capacity to borrow money and also to service not just the loan but to weather any unexpected costs that come along – like periods of vacancy, special levies, interest rate increases, etc.
4. Your costs. How much can you afford to outlay each month/year to hold the property? How will an interest rate increase or extended period of vacancy affect you?
5. Your timeframe. How long are you planning on holding the property for?
Once you know all these numbers that are about you and what you can manage, you then need to look at the numbers relating to the property.
- What’s the price and what are comparative properties selling for? (make sure you’re comparing recent sales, especially in the current market that is fluctuating)
- What’s the estimated or actual rent on the property?
- What is the forecast population growth and how much infrastructure investment is there in the neighbourhood?
- What’s the local rental vacancy rate?
- Is there anything happening in the neighbourhood that could positively or negatively impact rental yield or demand – or even capital growth potential?
- What are the tax benefits? Can the property be depreciated and, if so, buy how much annually?
- What are the costs of owning the property? We always recommend running a cashflow forecast at a couple of different interest rates and rent rates. Costs include (but are not limited to):
- Loan repayments
- Building and Landlord’s Insurance
- Property management
- Rates and any utilities that you’re responsible for
- Strata levies
- What’s the potential for capital growth?
The difference between buying a home and an investment property is that a home is all about what you want. It’s where you’ll be living, on your own, with your partner or with your family – it will be your base for however long you decide to hold it. It has an emotional investment, whereas buying a home for someone else to live, it’s all about the financial investment and potential returns.
The numbers really are what you need to focus on when you’re investing in property.
Do your homework now. Make sure you’re not going to be placing too much financial strain on yourself. Make sure you’re confident in your investing strategy and the property you decide on. Always ask for advice.
We can never be 100% certain of the returns we will earn from investing, but we can minimise risk by taking a good hard look at all the relevant numbers.