Property investment can be complex and, if done poorly, can also be highly costly.
So what do you need to consider to help avoid any financial traps and make the process easier?
When done right, there’s no doubt that property investment can be a significant wealth creator.
So what do you need to consider before buying an investment property to help ensure success?
Here are 5 things I think you need to consider before buying an investment property:
1 – Your finances
Perhaps one of the most important aspects of property investment (other than selecting the right asset) is your finances. Investors need to have a firm understanding of their household budget, with a particular focus on 2 aspects:
a) Their financial capacity to acquire an investment property, and
b) Their disposable income to service the debt on the investment property.
By understanding these 2 aspects, investors can narrow their search requirements to find a property that will work within their financial parameters.
2 – Your long-term plan
A property investment plan is key to building a large property portfolio. Unfortunately, the large majority of investors never buy more than one property, which is why a plan is crucial as it will help you stay the course.
Your plan should map out a long-term blueprint of your investment journey, including your goals (i.e. the net wealth you want to create and by when), financial parameters, risk tolerance and life circumstances. Your plan will have to be updated as your circumstances change and as you move through your investment journey.
3 – The type of return you want
Investors will often become caught up in the process of buying a property without actually considering what they want from the property itself – capital growth or rental yield? Typically, investors aged 20-55 should target properties that grow in value, as this will increase their personal wealth.
Those nearing or in retirement should focus on properties with higher rental yields as this substitutes their salary and provides them with greater disposable income. Investors at this stage should also consider direct commercial property investment as well as commercial property trusts, which typically provide higher rental yields than residential property.
4 – Your motivation
If you want to invest in property to become a multi-millionaire overnight, you’ll be grossly disappointed. Property investment requires a long-term view (at least 7-10 years) and you’ll have to go through several ebbs and flows in the market (and buy successive properties) to start growing substantial wealth.
5 – Your research
Consider the sources from which you’re receiving your information. Selling agents are legally obliged to work for the seller, developers will only promote their own stock and some self-proclaimed “property advisors” may be receiving commissions from developers.
If you’re being offered free property investment advice, this should raise some red flags, which is why engaging an independent buyer’s agents is beneficial, as you can be sure they will have only your interests in mind. Furthermore, be wary of so-called “hot spots” that are touted in the media and by property spruikers. Property is a long term investment and while “hot spots” might sell papers and seem appealing, they come and go so it’s best to focus on areas that will perform over the long run.
Article Courtesy of: Damian Collins, founder and managing director of property investment consultancy Momentum Wealth. Offering market leading research and advice on the Australian property market, the company helps clients accelerate their wealth through property investment by assisting them in the strategic planning, financing, acquisition, management and development of their commercial and residential investment properties. Damian has completed a Bachelor of Business at RMIT University and a Graduate Diploma in Property at Curtin University. He is a board member of the Property Investment Professionals of Australia (PIPA) and is the Deputy President of the Real Estate Institute of Western Australia (REIWA).