It appears most people are now aware of the need to look after themselves in their twilight years, as pensions, welfare and superfund’s become under increasing pressure in such uncertain times.
Consequently investors are taking steps to set themselves up accordingly towards that and many people are turning to the stability of bricks and mortar. However there are still a range of areas that many investors, particularly first time investors, are overlooking. These can all cause problems for the overall investment portfolio and some of these fundamental areas to look out for are:
1 – Neighbourhood Investments
While you’re very own neighbourhood maybe a wonderful place to raise a family or a place in which to secure your first home – it doesn’t necessarily follow that you will secure good rental returns or capital growth. Many new subdivisions are testimony to this, you should be purchasing in a suburb because it will give you strong capital and/or rental returns, not because you are familiar and comfortable with the area. It also makes good sense to spread your risks and invest in other suburbs.
2 – Risk Aversion
A good majority of investors, while feeling comfortable with a particular locality or type of investment tend to repeat multiple purchases in the same locality and/or type of property. It makes sense to spread your risk and stock your portfolio with a varied range of localities and types of properties.
3 – Rental Focused
Too many investors are blinded by rental returns and tend to overlook the capital growth of the property. Provided the investment is held over the long term, you will find capital growth will be a far more powerful wealth creating tool, remembering only 50% of the gain is ever taxable and you can continually borrow against the increased growth to find further investments.
4 – Cash Flow Positive
Be wary of cash flow positive property. These are rare in residential properties in Perth and usually there is an underlying catch i.e. the rent may have supplemented, the return may be compensated by low capital growth or they may have a specific zoning or feature (i.e. serviced apartments), which can in turn affect the growth in value. Remember if you generate cash flow positive, every dollar of income will be taxed at the appropriate rate you are currently paying, each and every year. Whilst capital gains can be effectively minimized or if you never sell you will never pay tax!
5 – Presentation Plus
Just because the property presents well doesn’t automatically qualify this as a good investment. It may look great but will it give the rent and capital growth returns you are seeking? Does the fresh paint and carpet cover up any misdemeanors and does the presentation cause an artificially high rent, which possibly can’t be attained in the future?
6 – Short Term Rentals
These returns are always much higher than conventional rents but what are the real costs? – vacancy, management fees and more importantly if these rents are not sustainable, you can be caught short – always factor in your budget the normal market rent – anything over this is then a bonus.
7 – Off Plan Purchase
Be very wary that all the fundamentals stack up on properties you purchase off-plan, be very careful all specifications, sizes, locations etc. are most importantly checked and the contract documentation via your solicitor, finally plan your cash flow requirements for deposits, stamp duty and progress payments.
8 – Short Term Gains
Investors who entered the market over the boom years witnessed healthy gains in the value of their property, but please remember property is long term and the costs of entering property can be quite high ie. stamp duty, settlement and mortgage costs and if you were to sell within 12 months of purchasing you will also be liable to have all profits taxable.
This is just a short cross section of some areas that all investors should seek to understand before entering the rewarding field of Property Investment. One major rule is that purchasing property should be for the long term and typically held for a minimum of 5 years.
Image Credit: Business House Shutterstock