A Finance blog by Paul Bennion.
The start of the new financial year is a good time to enter the investment property market for the first time. However, the harsh financial reality means that many first time investors will never go beyond their first property. Simple mistakes can hold investors back from expanding their property portfolio and growing wealth.
Generally, the very first investment property purchase will determine your success in building a successful property portfolio so it’s important to do as much research as possible before investing.
Follow our ‘Dos and Don’ts’ to avoid some of the common mistakes made by first time investors:
- DO choose an interest-only loan over a principal and interest loan.
- The interest component of the loan is the only part of a home loan that is deductible for tax purposes and the amount of money you spend paying off the principal limits your cash flow to purchase additional properties.
- DO undertake a tax depreciation schedule at the time of settlement, using a professional tax depreciation company. If don’t complete your tax depreciation report at settlement you may not be able to claim the generous tax depreciation benefits you are entitled to. These can equate to 60% of the purchase price of your property, and this cash flow can assist you to buy additional properties.
- DON’T buy an older property that can drain your finances through maintenance costs. New buildings can come with a builders’ warranty and older properties tend to have less attractive tax depreciation benefits.
- DO conduct a full assessment of the true cost of buying and holding the property. Consider additional costs such as strata fees that can eat into your cash flow and limit your buying power.
- DO buy a property in an area attractive to tenants. Properties not located in close proximity to shops or transport generally have higher vacancy rates and lower rents.
- DON’T buy in an area where there is an oversupply of properties. Rents will be low and capital growth rates limited. Without capital growth, you may not have enough future equity to use as security to purchase additional properties.
- DON’T try to select your tenant yourself. Use a professional, reliable property management company. First time investors who experience a bad tenant who doesn’t pay rent or who damages the property will often sell their property because of the financial losses incurred.
- DON’T buy with the view to a quick return. An investment property should be viewed as a long term investment and stepping stone to purchasing a portfolio of properties that will fund your retirement. Watch out for properties that may be overvalued or have artificial rental returns built into the purchase price that cannot be sustained over the long term.