Property Investment FAQ

Welcome to The Successful Investor’s free Property Investment FAQ

We welcome you to submit any questions you have regarding property investment and one of our knowledgeable team members will respond and publish the answer here.

Unfortunately Barry, there is no easy answer here. It’s important to beware of ‘experts’ who advise exclusively one way or the other though, because they probably only sell the type of property they recommend. My advice would be to buy what the market demands; if you already have a location in mind, focus your research on what type of property is in demand long-term in that area. If you plan to build a portfolio of properties, then a mixture of houses and apartments or townhouses is a good strategy. Some investors like to buy apartments because the body corporate looks after the property, and some don’t buy apartments because they do have a body corporate and therefore body corporate fees; so like I said, there’s no simple answer. Apartments are usually less expensive though, so that may influence your decision.

Largely this is determined by the bank’s assessment of your loan serviceability and your equity, but let’s leave that aside for the moment. My advice would be to buy again when you are relaxed with your last purchase. What I mean by that is you are so comfortable with owning your last property that you forget about it sometimes. You’re no longer stressed or worried about having bought the property or getting a tenant. However, make sure you don’t leave yourself in a vulnerable position by using all your available equity to purchase your next property unless you have other funds to fall back on in case of emergency. Also, make sure you fully understand the cash flow and how this will impact on your life and budget before you buy your next property.

That is certainly something to consider, but it will depend on the layout of the properties and the location of sewerage and so on. Speak with a Town Planner and make sure you research the costs involved. Keep in mind that it can take up to 12 months to subdivide, as councils often drag these things out unnecessarily. Having the properties on two titles probably won’t increase your rent return, but it can add value if you want to release equity or sell. More people buy one property at a time than two, so having the properties on individual titles will make them easier to sell.

She may be right for your personal circumstances, however you should understand the pros and cons of buying off the plan and make sure you’re comfortable with them. For instance, I don’t recommend buying off the plan if your job is not secure, unless you can easily get another. You can also reduce the risk of buying off the plan by making an offer “Subject to Finance”. Also make your offer “Subject to a Satisfactory Valuation”, and make sure the property is complete before your finance approval expires.

Buying with relatives is how many people have started out investing in property. It can have it’s issues though, mainly because people don’t treat the exercise as a business decision. If you are going to invest together, my advice would be to make sure you have an agreement in writing. A potential issue is when to sell; one of you may want to use funds from the sale to travel, buy a home to live in or something similar. Have a written agreement that states you are always allowed ask the other to sell however if their answer is no,that decision is final. Both agree on a date when if one of you wants to sell the property then it’s sold, and again, no arguments allowed. The first date should be about 5 years from when you buy the property, then maybe every one or two years after that. You also mentioned that one of you may live in the property later. If you do then you must charge market rent or miss some tax deductions. If you rent a property at a discounted rate to a family member or friend you must adjust your tax deductions accordingly. Check this with your accountant. One final word: Always be careful, as buying a property with a family member or friend is a potential relationship breaker.

Just make sure you make your offer ‘Subject to Satisfactory Valuation’, and make sure you work with a banker who will tell you what it values at. Most Real Estate Agents in Armadale are auction mad, so make sure you attend at least 10 auctions in the area before you bid. If you are not confident then use a buyer’s advocate to bid for you. Their fees start at 1% of the purchase price if you found the property. We can do that for you if you wish.

Both can be great, it just depends on your individual circumstances. To my mind, the main point here is making sure the cash flow works for your situation. I wouldn’t advise anyone to buy an investment property unless they can easily put $50 a week towards it. Don’t buy a poor property just because of decent cash flow, and by the same token, don’t buy a good property if it may be a drain on your finances. For more on both sides of the argument read ‘How to Create an Income for Life’ by Margaret Lomas and ‘More Wealth from Residential Property’ by Jan Somers. Jan will say something like “this property will only cost you $100 a week”, and Margaret will say something like “why would you buy a property that costs you money each week?”. Both books are full of really valuable information, but contrasting opinions; it’s just a matter of doing your research, and finding out which strategy will suit you best. For $55 we will prepare a 16 page cash flow report on any property you are thinking of buying.

This is a great question, and one I get asked a lot. Firstly, it helps to have a good accountant to discuss this with. Make sure you have what I call a ‘planning’ accountant – not just one who does your tax. Secondly, don’t be afraid to sell if it means paying off personal debt. Unless you are selling the property to retire, be careful of selling and not replacing the asset. For example, if you sell a 400k property in 2012, it would have been worth about 800k in 12 years. So, if possible, replace any sold property so you don’t lose the capital gain. Also, make sure you check with your accountant about the tax implications of selling so you don’t spend the sale proceeds and have a capital gains tax bill you can’t pay.

This is an interesting point. Start by asking yourself what you want to achieve; are you looking at this exercise to get extra rent, or to add value to the property? In either case it comes down to the numbers. First, let’s look at the sums if your goal is to gain higher rent.

$120,000 at 7% interest will cost you about $161 each week. The interest is tax deductible, so after tax it will cost you about $110 per week. You will also get further tax breaks from depreciation, but let’s leave that aside for simplicity.

So does this mean you need an extra $110 a week rent to break even? Well no, because you have to pay tax on the rent you receive. That means you need to get about $161 a week extra rent to break even.

Also, keep in mind that this exercise may take you up to 12 months and quite a bit of your spare time. So what is the point if you are only going to break even? To my mind, it would have to be substantially worth your while.

Let’s say after paying the interest on the $120,000 you are in front an extra $100 a week, then is that worth the effort?

Well that would make you $52,000 over 10 years – not bad! But if you used that extra $100 a week as an extra payment towards the loan on the property you would save $191,000 in interest. Better than not bad!

So my answer is that it really depends on the figures. Speak to your property manager and your accountant and use the calculators on this site to help you make your decision.

Now let’s look at the increase in property value you may get by doing this renovation.

Obviously the property must increase by $120,000 to break even, or what would be the point?

There are also a few other things to consider here.

Think about this: if you add $150,000 in value with the renovation then you will make an extra $150,000 in growth in the next 12 years (properties double in value in 12 years at 6% p.a. growth).

But if you used that $120,000 as a deposit on another property instead, you could buy one worth about $480,000. At a 6% capital growth rate, this would make you a $480,000 capital gain over the next 12 years – much better than $150,000.

So based on these comments you may think not renovating is the answer, but what if you could have the best of both worlds? That is to say, use your $120,000 to renovate and also use it to buy another investment property?

Allow me to explain.

You could use your $120,000 to renovate, but only if you are confident you will achieve at least $150,000 of additional equity by doing so. Then, once the renovation is complete, borrow against the new value (150k x 80% = 120k) to get your $120,000 back, which you can then use to buy another property.

Sorry I can’t be more specific Peter, but really this is all about options, so look at it from every angle and the answer should present itself. Don’t forget to run all the options past your accountant too.

If you have not gone unconditional they you should be able to withdraw, speak with your solicitor and find out where you stand. That is provided you made your offer subject to finance. If you are unconditional on your contract then you can’t cancel unless the vendor allows. Ask the question, but it is unlikely they will say yes. I would advise you to speak with a mortgage broker to discuss your options. It may just be a bad valuation, which could be resolved by going to a different bank. Perhaps paying lenders mortgage insurance and borrowing more than 80% of the purchase price may be your solution. I’d recommend calling our office Daniel and booking a free consultation with us so we can fully understand your circumstances, then we may be able to offer further help.

Not if you keep buying in one state in your name. It does make sense to buy property in different markets, and not just because of the land tax. People refer to “The Property Market” in Australia all the time but the fact is there isn’t just one market in Australia, there are many. I’d advise you to diversify and spread your risk; by being in a variety of markets your chance of capital gains is greatly improved. If you don’t like buying sight unseen then do your research online and jump on a plane, or find a company (like TSI) that you trust and take their advice.

*disclaimer
This information is general in nature and should not be considered personal advice. You should always seek personal advice before making any investment decisions. We reserve the right to publish your question along with our answer to this website.