Why do people do it?
Approximately 20% of all Australians invest in property for the potential capital growth and opportunity for rental income and tax benefits. They tend to consider how property as one of the more solid, less volatile forms of investment because you can touch bricks and the physical house. The 20% of Australians love the feeling of getting financially ahead and don’t aim to become one of the 80% of other Australians who have to rely on the aged pension when they retire.
Why others DON’T?
On the other hand, 80% of Australians don’t invest in property and this is due to the lack of information readily available for individuals to take their first step. Individuals don’t know how to ensure their investment is not threatened by interest rate rises or unreliable tenants. They aren’t sure how to pick appealing properties for good rental return. They don’t realise they can probably afford to invest in property, even if they don’t currently have a big salary. Overall, they believe all debt is ‘bad debt’ and don’t understand that an investment property could make them money and possibly pay itself off.
Here are some time-tested strategies to help overcome common initial jitters about investing in property. Getting an education from people who are investors themselves is the fastest way – go to those ‘in the know’.
1. Being comfortable with your debt level and being able to afford the repayments.
Borrowing to purchase income-producing assets such as investment properties is considered by financial experts as ‘good debt’. Rental income is generally used to pay the mortgage and expenses whilst the owner benefits from any capital growth in the value of the property. Bank guidelines can also reduce your risk because they simply won’t lend to you if they believe you can repay the debt (and also allow for interest rate rises).
2. How to keep making repayments on your investment property if you lose your current job.
Positive cash flow within property- This is where your rental income exceeds the mortgage payment and property expenses. Direct the excess rental income into your offset amount and hold it there as your ‘rainy day account’ to cover any future loan repayments if you find yourself unexpectedly unemployed or financially strained.
Negative cash flow property- Negatively geared property is when the mortgage needs ‘topping up’ from your income.
Your property deductions/ out of pocket expenses may help you to secure a tax refund at the end of the financial year. Save your tax refund as a buffer. Alternatively, your accountant can help you request access to your tax refund for a reduction in your weekly tax. Put this extra amount aside and it will help accumulate a buffer to maintain the property in the unfortunate even that you lose your job, or your income is reduced at any rate.
3. Risk of not securing a tenant.
The best way to mitigate this risk is to carefully select a property with high rental appeal. Only buy in high rental areas where the vacancy rate is consistently less than 3%. It is also sensible to select a property manager before you settle so they can secure tenants immediately.
4. Possible problem with bad tenants.
How do you pay the mortgage if the tenants don’t pay their rent? Or pay for repairs or damage if they’d do a runner? The answer is landlord insurance to cover any losses. The cost of this insurance is minimal when you consider the cost of not having it – and it is tax deductible as well.
5. Coping with interest rate increases.
Changes to interest rates are a fact of life. If you are going to invest in property allow for interest rate increases and only purchase property that you can afford to hold onto even if rates arise.
6. An exit strategy is your ‘pull the pin’ plan.
It is best to put this plan together in the cool light of day, before you buy, because doing it under pressure can lead to the wrong decision. An exit strategy gives you peace of mind and allows you to sleep at night.
We are a referrer to the Astute Property Network providing you with Property investment education.
Call our office today on 1300 881 579 and make an appointment to discuss your property investment plans. You’ll need a clear idea of how much you can borrow before you start looking at properties.
E-mail: simon@gvfinancebrokers.com.au
Office Location at 97 Fryers St, Shepparton, Vic 3630