| When looking to invest in property its always
important to take a structured approach to ensure you get only what you
are looking for. Over the years I have developed the following structure
and Ill always stick to it so that I know I have done all the homework
necessary to make a sound investment and reduce any potential risk to a
level I am comfortable with. Step 1 – Research Research Research
This is possibly the most important aspect of any investment decision.
When I talk about ‘researching’ a potential investment, what I mean is to
do all the necessary homework to find out if the investment is right for
you and if it will provide the return you’re looking for.
Sometimes it is tempting to overlook research and maybe follow a tip
from a friend on a potential investment. Many people also don’t do
research because they don’t know where to find the required information
and so they may make a blind investment, hoping on good returns. Even
worse, they may put off making the decision (to invest or not to invest)
and stay stuck in procrastination while the asset starts to show strong
growth.
So what needs to be researched before investing in property?
Location – such things as the population, main industry, main
employers, future investment in infrastructure, tourism, local
universities.
Property prices – average, median, recent sales, potential
rental returns, previous and predicted growth.
Tax and ownership laws country and state laws, occupier/investor
tax rates.
There may be more areas you need to research depending on your
situation but the main objective here is to carry out the research to a
level you are comfortable with. You can never do too much research.
Thorough research will give you peace of mind to make confident
investment decisions.
Whatever you are trying to achieve, someone has already done it before
and the information is out there. It may be in books, newspapers, special
reports, published on the Internet or available from real estate agents.
You can find the information you need to make a confident investment
decision.
Step 2 – Know your Numbers
Note: This step primarily deals with rental returns and does not take a
properties annual appreciation or depreciation into account.
Before investing in property its important to do the numbers to know
What you can afford to purchase
Purchase and ongoing upkeep costs
Potential rental returns
Monthly cash surplus or deficit
Once you know all of these figures you can then decide how much you can
afford to spend within your budget, what rental return you're looking for
and whether you will gain a monthly cash surplus or if you will need to
contribute towards its monthly upkeep.
So what are the common numbers to know and calculate?
The Purchase Price
Purchasing Costs items such as Stamp Duty, legal fees, real
estate agents commission, legal fees.
Rental Income If the property is rented to tenants, how much
rent can you charge?
Ongoing Costs Management Fees, mortgage repayments, repairs and
maintenance, letting fees, Municipal or Council rates.
Net Return this is the end result once you have accounted for
all of the income and expenditure and it will show if you will have a cash
surplus or deficit.
The more properties you calculate returns on, the better idea you will
have of what is available in the market to suit your requirements. You'll
also protect yourself from any surprise costs. Its wise to be conservative
with your calculations and maybe add in a contingency amount.
Please remember, there may be more costs you need to factor into your
calculations according to your situation
Step 3 – Create your Criteria
Before you go shopping for your investment property its important to
know exactly what youre looking for so that you buy a place that suits
your requirements. The best way to do this is to create a list of certain
criteria that a potential property must meet.
You may choose to be stringent on some of the criteria such as a set
limit for the purchase price but then you may be a little more flexible on
other criteria like accepting $10 less than the expected weekly rent.
So what would you include in your criteria? Here are a few suggestions:
Town population no lower than 10,000
Expected rent at least 7% of the purchase price
Brick house on land, no more than 10 years old
Initial repairs to cost no more than $1,000.
Whatever criteria you choose is up to you but it gives you control over
what you buy and will certainly decrease the time you spend looking for a
property. From carrying out your research and working out the numbers you
should find it easy to create your criteria. Now you can go and buy the
property that's right for you.
Step 4 – Property Insurance and Management
Like any investment, we always look to minimize the risk of loss or
damage and its no different when it comes to property. There are a number
of ways to do this including taking out a suitable insurance policy and
finding the right property manager.
Whether you buy a property to live in or rent, it is potentially at
risk for various reasons and so you can insure the property against these
risks. Insurance policies can cover you for loss in the case of structural
damage, theft, flooding and many other instances.
landlord insurance policies are also available for extra cover of
instances such as malicious damage, legal fees, loss of rent etc. So shop
around for the policy that's right for you.
If you are buying a holiday home or a rental property you might
consider employing the services of a Property Manager. The role of a
Property Manager is wide and varied and a good one can save you a lot of
time and money.
They can find new tenants, arrange to have your property cleaned,
collect rent, keep an eye on your property, pay your bills out of incoming
rent and much, much more. Finding the right Property Manager will pay off
rather than choosing someone who wont look after your property the way you
want them to.
Its important to shop around to seek out the best Property Manager and
you can do this by asking the right questions. A good Property Manager
will communicate regularly with you and be available to address any
concerns you might have.
Additional measures to secure your investment include the local
neighborhood watch, security alarms, window locks and smoke alarms.
Step 5 – Tracking your Investment
Once you've invested your hard earned cash you'll want to know how its
performing and what sort of return you're getting. Again, were only going
to look at rental returns rather than growth as the growth is only
speculative.
Every month you should keep all receipts of income and expenditure
concerning the property. This includes:
Statements from the Property Manager
Bank mortgage statements
Receipts for repairs
Payment receipts for Municipality or Council rates
Any correspondence regarding the property
All we are doing here is tracking the income and expenditure so we can
see what the return is. By tracking the figures regularly you can see how
your investment is performing and this information can then be filed with
your annual tax accounts.
Your accountant will be able to advise you on what extra records to
keep ensuring you get the best annual deductions.
And that's the final step to Successful Property Investment. All it
takes is one step at a time to become familiar with the process and
although there are many other ways and processes advocated by many other
investors the end result is ultimately to leave you empowered to make the
correct investment choices.
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