10 things you should know about investing in property

Investing in property is a tried and tested method of building long-term wealth - particularly if you follow the rules. When deciding on your investment strategy, consider the following:

1. Knowledge is power

Successful property investment requires thorough research and common sense. This is not a get-rich-quick scheme so cutting corners at the planning stages could jeopardise your success. You can never do enough research. Monitor 'big picture' factors like interest rates and demographic trends, rental vacancy rates and median house price trends. Learn as much as possible about your preferred areas by keeping up to date on auction results, planning developments and community issues.

2. Know the costs

Your budget is the first consideration of your investment. When calculating how much you can spend on an investment property, you need to consider your:

• income
• lifestyle
• deposit
• investment priorities
• borrowing capacity.

It's important to factor in hidden purchase costs. These can add up to around five per cent to the total purchase price and can include, for example, loan establishment fees, valuation fees, pest and building inspections, conveyancing, stamp duty, insurance, mortgage insurance and pre-letting maintenance.

3. Total yield equals rental returns plus capital growth

There are two types of reward that can be achieved by investing in property: rental income (yield) and increase in value (capital growth). These are the fundamentals that will underpin your investment strategy.

Decide what you want from your investment. If you are retired and plan to use the rental income from your investment property to finance your lifestyle, then rental yield will be particularly important.

If your investment is a long term one you can focus more on areas and properties with long-term potential for growth and increase in real estate values.

4. Location, location

Location is particularly important when it comes to choosing an investment property because it will have to appeal to a range of potential tenants. Leave your emotions at the door and only buy in a growth area.

Generally these can be defined as established suburbs up to 10km from the CBD of a major capital city, although this isn't a hard-and-fast rule. Areas of high rental demand are often close to transport and public amenities.

5. Consider the worst house in the best street

Many people believe that buying the worst house in the best street can maximise their profit. It highlights that the quality of the area is generally more important than the house itself, since real estate values increase across general areas rather than individual properties. Obviously you can improve your property but you can't improve the street, so choose wisely. Trees, landscaping and off-street parking will add value to the property.

6. Buy a property with broad appeal

While your choice of investment property will be largely determined by price, think carefully about its style, size and location. Generally period homes and flats have stronger appeal and better resale value.

Think about the potential for both rental return and resale value. Family homes, for example, are more expensive to buy and can be more difficult to let, but can have high potential for increased resale value.

Desirable features (for buyers and tenants) include:

• storage
• character architecture
• residential zoning
• good security
• on-site parking
• views
• low crime rate
• balcony
• modernized bathroom and kitchen.

7. Get the right finance

A number of options are available. Even if you don't have a cash deposit, unlocking the equity in your existing property can be an option. Take into consideration interest rates, repayment arrangements (variable or fixed) and costs associated with loans such as ongoing fees and break costs.

8. Take advantages of tax benefits

The potential tax advantages of negative gearing are a key feature of property investment. This popular investment strategy can be a way of reducing your taxable income by deducting the costs associated with running your investment. Before you buy, speak to your accountant about the possible tax benefits and implications of property investment. Also familiarise yourself with Capital Gains Tax (CGT) and don't forget to be disciplined with your record keeping.

9. A good landlord is a successful investor

If you purchase an investment property to rent out, protect the value of your investment by being an attentive landlord. Inspect the property at least once a year, and stick to a regular schedule of repairs and maintenance. Choose tenants wisely and keep them happy, as this can help maximise your rental income. If you don't have time to be an attentive landlord, it's worth hiring a property manager.

10. Investments require constant reassessment

Whether you hire a property manager or manage the property yourself, you need to keep up with market developments in order to maximise return on your investment. Regularly reassess the rate of rent, the property's condition and current tenants.

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Related links

• How to use the equity in your home to invest in property - Edition 27 Autumn/Winter 2008
• How to pick an investment property hotspot - Edition 27 Autumn/Winter 2008
• Buying a property investment in joint names - Edition 25 Spring 2006