Investment in rental property offers a plethora of benefits. It can provide a stable, passive income stream from rental yields, capital gains when you sell the property after it appreciates in value, tax deductions, greater security for your future plans and more.
And the rental market is thriving. Homeownership has become out of reach for many over the years, due to soaring housing prices and tightening lending regulations. Also, many Millennials want to maintain a flexible lifestyle where they can move any time they desire and avoid the extra responsibilities that come with owning a home.
These trends have made the rental property investment market an even bigger opportunity for beginner investors. But it still takes good planning to succeed.
If you have decided that rental property investment aligns with your financial goals, here are eight tips for buying your first rental property.
1. Calculate Your Cashflow In Advance
Cashflow refers to the net amount of cash brought in by the property you are holding. In case of an investment you are renting out, your rental income decides whether your cashflow is positive or negative. It is positive only when your income exceeds expenses.
Determining your income and expenses for the property will help you decide whether or not you should commit to the investment. In the first few years, it is common for the rental income not to cover all the expenses of a property, like mortgage repayments, repair and maintenance, utilities and other fees.
Keep in mind that holding onto a property can be beneficial even when the cashflow is negative, thanks to negative gearing. In that case, the question is will you be able to cover the shortfall of the rental yield from your own pocket until the rental yield increases or you can sell for a profit.
It is best to invest only if you can bear the costs of the property when the cashflow is negative and you expect to be able to make a large profit from the capital gain when you sell.
Talk to Home Loan Experts’ mortgage brokers, who can help you get a loan for your rental investment according to your unique circumstances.
2. Determine Your Investment Goals
Factors like demand in your property’s area, the appreciation rate, and nearby development plans should all align well with your investment goals. Determine your goals first, then get the right property to help you achieve them.
If your plan is to get good capital gains, you need an investment whose value will increase rapidly until you sell it; invest in an area where developments have been announced. If your primary aim is to get a steady income stream, purchase in a residential area with schools nearby, to attract young families.
Purchasing after you have decided what you want to achieve through the investment will make the decision much easier and your chances of success will increase.
3. Select The Property Based On The Tenants You Want
Properties in different locations appeal to different kinds of tenants. Create a list of features that tenants you want would prefer, and select your property based on these.
If you wish to rent to young professionals who can afford higher rents but are likely to be there for the short term, find a stylish apartment in a city, with various entertainment hubs nearby and an ongoing influx of people looking to rent. If you wish to have a stable rental income for a longer time, and do not mind lower yields, purchase a house in the suburbs near schools, parks or public transport, where a family with kids might want to be your tenants. Try to provide amenities that your tenants would prefer. This will help keep demand for your property high and rental income flowing in.
4.Contact A Property Manager Before The Purchase
A property manager is an expert at providing information relevant to tenants, both before and after you purchase the property. While their job is to help you attract and retain a good tenant once you make the property available to rent, they can also give you information before you buy that could affect your purchase decision.
They can tell you which locations have the highest demand, what kinds of properties tenants are looking for in an area, what amenities they want, and what kind of rental yield you can expect from various properties. They are in constant communication with people looking to rent and you can rely on them for details on the latest trends in the market.
5.Due Diligence Is Key To Cutting Extra Expenses
Taking the time to research any property you are interested in will help you save money in the long run.
The first step to doing your due diligence is to get a building inspection. You do not want to spend tens of thousands of dollars or most of your weekends at your rental property doing maintenance on a poorly built property. For your first rental property, it’s better to buy a new home that requires little maintenance. But you’ll still need to have it inspected.
Also, check for development plans in the area where your property is located. Future plans in the area might increase or decrease your property’s rental demand. A rehabilitation centre in your neighbourhood will drastically reduce your demand, while a new public transport line might make your property a hit in the market.
A brief inspection of the neighborhood for noise pollution or problematic neighbours can also help you avoid prolonged vacancies.
6.Consider Buying An Off-The-Plan Property
Competition in the housing market can be fierce. To avoid the competition and save, consider buying an off-the-plan property. This will reduce your investment cost and help you make a profit off the property sooner, which you can use to expand your portfolio or reach other investment goals.
7.Learn About Tax Deductions For Investment Properties
One of the major benefits of investing in a rental property is the available tax deductions. If the cost of owning your investment property is higher than the income it generates, you can deduct the shortfall from your taxable income. This is known as negative gearing and many investors use it to reduce their tax payments.
Not only can you deduct the losses you incur, but also you can claim depreciation on your property. Depreciation is the value that your property loses annually due to wear and tear. It can be claimed on a property’s structures and equipment, or any fixtures on your property.
Talk to a financial adviser to learn more about how to lower your taxes using your investment property.
8.Get A Pre-Approval Before Buying
Getting a pre-approval for your investment property ensures that you do not purchase beyond your means and that you have the ability to buy as soon as you find your ideal property. Once you have the paperwork ready, you won’t have to worry about losing your favourite property to a competitor while you wait for loan approval.
Venturing into the rental property market is much easier with expert mortgage brokers beside you. Not only can they help you find the best properties for meeting your investment goals, but also they can help you get your loan approved with the best interest rates.
Call us at 1300 889 743 or fill out our free enquiry form so we can assist you in the purchase of your first rental property.