Investing in property can be quite a lucrative venture. But like any investment, before you become a guru, there are some basics that you need to first master. This article will cover some of these.
A very popular investment strategy is buying and renting out property. The reasons for this are quite clear:
- You can use ‘the bank’s money’ to purchase the property
- You can earn regular rental income on the property
- Property offers a physical asset that gives you a sense of ownership and pride
- It also offers the opportunity of seeing the value of your property increase over time
- You are generally protected from the state of the rest of the economy once the property is paid off
- The value of your property generally remains stable. Its value could be increasing, flat or decreasing but it won’t fluctuate over short periods of time.
First steps to becoming a property guru
It is important to consider the following issues.
Your ‘credit worthiness’
In order to begin your journey, you will need to raise money. A key aspect in direct property investment, is to ‘use someone else’s money to make money’. A bulk of the money you raise will therefore likely be via a loan from a bank or another provider. To get a loan, you will need to be considered ‘credit worthy’. This means that, whoever is giving you the loan to buy the property you want, needs to believe that you will be able to pay them back.
Your ability to pay back, will be assessed using a number of factors, including:
- Your credit score (more about that here: know your credit score
- The size of the repayment amounts
- Your current income
- Your current expenses
To have a good chance of getting the loan, you will need to ensure that you have a high credit score by paying all your existing loans on time. You will also need to ensure that your expenses are low enough for you to afford the additional expense of paying off the loan.
Location and Property value
Location and the property value are closely linked and will determine whether your investment is successful or not.
If you buy property in an area that is in high demand and has good growth in the future, then you will likely benefit from increasing property values.
If you buy in an area that;
- has increasing crime,
- is poorly maintained and
- has a bad reputation
then the value of your property may decrease. You may also struggle to get rent-paying tenants to occupy the property.
The above points have to be balanced with the price of the property.
Sometimes, you may still benefit from buying in a less opulent area if you are able to buy the property cheaply. This works well if you can charge a good rental fee. (‘good’ here means, an amount of rent that is relatively large compared to the amount you bought the property for.)
Its true that there is a danger that property values declines in time, but if you charge good rent(as defined above), then you would be able to pay off your property by collecting rent for a much shorter time than usual. After this, almost all the rent you collect would be profit. Even if the property loses all its value!
NB: This is not guaranteed at all. With any investment, there is a risk that you will lose money.
Pro tip: Most people choose location based on what they’ve heard from other people or how properties have performed in the area in the past. A more professional way to do this may be to make use of ‘Area Valuation Reports’ such as those that are offered by Lightstone Property Group. These reports tell you about future developments coming to a specific area such as shopping centres, schools and offices. These developments usually have an impact on the value of property around them so using such reports can help you make better investment decisions.
Ability to sell
Another important consideration on your way to becoming a property guru is how easy it will be to sell your properties. Properties typically take much longer to sell compared to other assets like listed shares. Your ability to sell also depends on the location, size and cost of the property. If you ever had to sell your property in a hurry due to cash needs, then this point becomes extra important.
The cost of buying and selling
Buying and selling property usually comes at a significant cost. When buying, you may need to pay:
- transfer duties and,
- bond origination fees.
When selling you need to consider commissions paid to estate agents as well as conveyancer fees (legal fees). These costs can be substantial especially if you buy and sell frequently (buying to sell in the short term).
More on these costs here.
There is a cost associated with owning a property; maintenance cost. You need to consider the fact that you will experience wear and tear overtime. There may also be expenses related to plumbing, wiring, paint, structural repairs etc. Some of these would be covered by your tenants, but many will land to your doorstep.
It’s important to take this into account when determining how much you expect to make from a particular venture.
Voids are periods of time when you do not have a tenant in your property.
You will be still required to keep paying your bond/home loan whether you have tenants or not. Therefore make sure should you experience voids, you still have enough cash to cover the bond.
Being a Property Guru comes with the responsibility of managing tenants. This can be a headache! Especially if you do not like dealing with people. From the onset, you will have to advertise to potential tenants, take them on viewings, screen them and collect payments from them. Some tenants pay late, don’t look after the property and can generally make your life difficult. You may even have to evict a family out of your property. These are the realities of direct property investment, so if you cannot stomach this, outsourcing to an agency may be a better option. This comes at a cost though as agents will take a percentage of your rental income.
How long you want to invest for
Property investments can range from short to mid term (if your investment tactic involves buying, possibly refurbishing and then selling quickly) to very long term investments (if your tactic involves renting out). A blend of both strategies is also an option.
But please note that buying and selling property takes time and can be very expensive. If you buy and sell property too frequently then you might end up losing money. If you are looking for quick money, then property is not for you.
You will have to think about the tax that will be charged on the rent you collect.
While you pay for the bond, the tax you pay can be reduced by costs you incur (e.g. the bond repayments) but as soon as the property is paid off then you may need to think more deeply about the tax implications. Capital gains tax may also be charged when you sell the property.
A more in-depth assessment with a tax practitioner may be advisable.