Smart, Safe, Strategic how to choose an investment property

17-Jul-2014

Investors need to put the right stepping stones in place before they start trying to pick hot properties and markets, so what are the key factors to consider when selecting an investment property?

The starting point, before you even begin searching for a property, is to set up your strategy. This involves working out important factors including your borrowing capacity, how much deposit you will put down, and how much of a buffer you need to minimise risk.

A trusted advisor can help you answer these queries.

As a general rule with deposits, many advisors suggest using all of your borrowing capacity so long as you do it safely. Your financing strategy must factor in any risks, which is where a buffer and income protection comes in. Borrowing an extra $20,000 to $50,000 as a buffer is a sensible safeguard in case something unexpected happens in the financial market or your life. With such security in place, you can use your leverage to build your portfolio.

The second key to choosing a property is to seek superior property research so you can target the best-performing markets.

Did you know, for example, Darwin has recorded growth of about 150 per cent in the past decade, compared with about 20 per cent for Sydney? This information is openly available, and good research can help you find the gems.

To access the best research, find a property advisor who uses independent research, not someone simply using data sponsored by a developer. It is sometimes hard to tell who is independent or not, but a warning sign is when a research house recommends a specific development, rather than more generally pinpointing a potential growth suburb or city.

The next step is to identify your price point. Many advisers recommend buying a property at a price that is within 10 per cent either side of the median price of a market. These properties generally deliver more consistent growth and give you the ability to use your leverage with a smaller deposit. More often than not, this calculation will put you in the $500,000 to $700,000 price bracket for properties, which gives you good flexibility.

With $250,000 to invest, many would advise investing in three properties worth about $500,000 – with five per cent deposit plus costs totalling about $170,000, leaving up to $80,000 as a buffer. This is instead of, say, buying one property worth about $1 million with a 20 per cent deposit plus costs, leaving no buffer. The first option gives you a more diversified, safer and usually higher-performing portfolio.

Such a scenario can also help minimise land tax, too. While a common way to reduce land tax is to buy in different states, a more advanced strategy entails using an ownership structure whereby you buy properties in separate names.

While many prospective buyers have an infatuation with pinpointing hot property areas, work out what you are trying to achieve.

Understanding your strategy, researching extensively, and selecting the right price point, will determine the best market for you. It will also increase your chances of real property investment success.


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