The chief executive of The Property Mentors, Luke Harris, said that while there is strong interest in property and the passive income that it can offer, it can be difficult for first-time investors to pinpoint where the starting line is.
He also emphasised that investors looking to build a property portfolio “from scratch” will find the process less stressful when equipped with the right strategies and industry knowledge.
Here are top 10 questions — along with actionable advice — that can help first-time investors (as well as experienced investors) to have a fuss-free property investment journey.
1. How do I start investing?
Mr Harris said that while purchasing a property is relatively easy, ensuring that the property will be financially successful and see sustainable growth in the long run is no easy feat.
Before committing to any property, the expert advised investors to ensure that they have emotional, educational and financial readiness.
First, he explained that investors need to have confidence and move out of their “comfort zone”.
“Emotional readiness means you need to objectively define and be emotionally attached to your overarching investment goals,” he explained.
But it’s not just having the motivation to walk the talk. Mr Harris said that this confidence must come with the right information to avoid making costly mistakes.
“Educational readiness means you need to understand which strategies and properties will work for your circumstances, so you don’t waste valuable time chasing down tactics that are irrelevant,” Mr Harris stated.
While being financially ready for a big purchase seems like an old chestnut, he said many investors fail because they overlook this component.
“[Not] all property strategies require a lot of capital (although it certainly helps and does provide you with a wider range of options). As a minimum you need to ensure your financial house is in order, have a good credit score, little or no bad debt, and a financial buffer,” he explained.
2. Which location is best for property investment?
When it comes to analysing the best location for property investment, Mr Harris said that there is a high degree of education and skill required to get it right.
He advised first-time investors to know the basics first. “You need to consider the underlying investment fundamentals: Population growth, supply and demand, stock and vacancy rates, surrounding and planned infrastructure. Is it close to shops, schools, hospitals and public transport?” he said.
The expert also shared a general rule of thumb that rookie investors can follow.
“As a general rule, the closer and newer the infrastructure is, the greater the likelihood of steady or growing demand. Likewise, you need to know your market and your competition, so that you can make sure you’re getting the biggest bang for your buck,” he explained.
3. Which property type is best for investment?
It’s an age-old question that even experienced investors are still debating. But Mr Harris advised first-time investors to consider three property types that, in his opinion, are “excellent performers”.
First, the expert recommended looking into new or off-the-plan residential properties, as this property type allows investors to fast-track a portfolio’s growth.
“It can rent for a higher price, is lower maintenance, comes with a warranty and provides tax depreciation benefits — allowing you to direct funds towards buying your next property and building your portfolio,” he explained.
Next, he advised rookie investors to consider buying an established residential property, as these properties offer an opportunity for value-adding.
“It can be improved to add value through renovation, subdivision or development; it can also be quickly bought, settled and tenanted,” Mr Harris said.
“Just be mindful that tax depreciation benefits are reduced and, combined with repairs and maintenance, can affect cash flow and slow down portfolio growth.”
Lastly, Mr Harris advised investors not to be boxed in residential properties and to explore commercial properties, which he believes can offer financial stability that most first-time investors look for.
“[Commercial] rents are often higher than residential, and tenants generally sign longer leases with built in increases and options to extend,” he said.
But he also cautioned that commercial properties have their own set of risks, as the sector is highly reliant on external economic factors.
4. How do I know if an investment property is good?
Mr Harris said that there is no one-size-fits-all answer to this question, as all properties are not created equally.
Instead, he advised investors to look at different factors to determine if an investment is sound, including their personal financial situation, supply and demand dynamics, property type, etc.
He also highlighted that even the smallest differences in a property could significantly change investment returns.
“From design elements such as access to natural light and ceiling heights, to the quality of the construction and the fixtures; there are numerous factors that may cause your property to gain, or lose, value over time,” Mr Harris said.
5. Is rentvesting a good investment strategy?
Rentvesting can be a “great strategy” to get the first step onto the property ladder, according to the expert.
Mr Harris said that while the main advantage of rentvesting is that it allows an investor to own a property without sacrificing lifestyle, there are plenty of other positives as well.
For starters, this investment strategy allows the purchase of a property anywhere in the country where the fundamentals are solid.
“In addition, if you purchase a property in a more affordable area that means less capital up front, so you can get into the investment market sooner,” he said.
Rentvesting also gives investors more freed-up capital. According to Mr Harris, renvesting allows investors to leverage their first investment real estate to buy more properties and consequently expand their portfolio.
Aside from these benefits, Mr Harris pointed out that rentvesting also allows investors to take advantage of the tax concessions, such as claiming deductions against an investment property income.
6. Is it a good idea to use super to purchase an investment property?
To buy a property using your super, one needs to set up a self-managed super fund (SMSF), an undertaking that Mr Harris acknowledged can be a tedious process.
However, Mr Harris laid out the advantages of super funds to finance your property purchase. “[You] can decide where your super is invested, as opposed to a fund manager making decisions on your behalf. And if you’re passionate about property, you can choose investment property as your strategy,” he said.
For investors looking to invest using their SMSF, he recommended looking into the rules set out by the Australian Taxation Office (ATO) to avoid getting into trouble with the regulator.
Aside from setting up the fund, he also raised other financial considerations that should be tackled with a financial adviser, including having financial buffers, saving up for a bigger deposit, and factoring in higher interest rates.
7. Can I invest in property without buying real estate?
Mr Harris said that getting your foot in the property market does not only involve buying a property, offering that there are other ways to invest in real estate.
He advised exploring real estate alternatives such as SMSF, peer-to-peer lending, small-scale private offerings and wholesale investment trusts.
“It all depends on where you are now, your circumstances, and where you want to be,” the expert opined.
8. What is a good rental income?
Mr Harris said that determining a “good” rental income is based on several factors and investors need to always keep their ear on the rental market ground.
“To maximise your rental income, you need to stay up to date with local market conditions and comparable properties in the area. This will help in discussions with your property manager about rental potential,” he explained.
He stated that if the rent is set correctly, a landlord would never have to worry about getting applications from prospective tenants. “[If] you are maintaining the property and being a responsible landlord, you can retain higher quality tenants,” he added.
He also urged investors not to be complacent and have contingency plans in place. “In a strong market you might achieve a higher rent, but when the lease expires or your tenant vacates, if the market has cooled off then your property risks sitting vacant if you don’t adjust expectations,” Mr Harris said.
The expert enumerated some strategic ways to minimise vacancy periods for rental properties.
“By dropping your rent you’re more likely to secure a tenant quickly and you’ll often have a choice of tenants. A quick cosmetic renovation can also attract tenants faster and produce a higher rental income,” he explained.
He also advised that buying a newer property can reduce vacancy periods. “Newer properties can also rent for more, because tenants will pay a small premium to live in something nicer.
“That means suitable heating and air conditioning, dishwashers, quality fittings, and showers, toilets and taps that don’t leak. Tenants looking to rent for longer periods will also prioritise these creature comforts,” he stated.
9. Short-stay accommodation v long-term renting: Which strategy is better?
Mr Harris said that investors looking to build a successful cash flow portfolio could consider adding their rental property on short-stay accommodation platforms to increase yields.
But in order to achieve success through this strategy, Mr Harris advised investors to be smart about setting prices.
“When setting price, as a rule of thumb you should aim to double your baseline rent. So, if you can achieve $400 per week on the long term rental market, you should aim to average $800 on the short stay market,” he said.
However, he cautioned that this strategy does not come without risks. “[One] of the biggest risks with a short stay strategy is cash flow fluctuation; you need a financial buffer to get you through low booking periods.
“Likewise, guests can cause damage to your property, insurance can be expensive, and you need to think about the time involved in managing the property yourself versus engaging a professional to manage the process for you,” he advised.
10. How does one find a good property manager?
While it’s possible for landlords to manage their own property, Mr Harris offered there are scenarios where working with a property manager is the best (and most convenient) option.
“If you have more than one property, or if you have an older property with higher maintenance requirements, or if the property is located in another state with different legislative requirements, or if your tenant proves to be a bit of a handful, or there is a dispute, or you’re not sure about how to implement a rental rise, or you need to find a new tenant in a hurry … then having a top notch property manager on your team is a must have!” he said.
He added that as a landlord, every investor’s priority is to get the top rental value or more for their investment at all times — and that’s where a professional property manager comes in.
“Nobody is better placed to understand current market conditions and appropriate pricing than a professional property manager,” Mr Harris stated.
So how do you find a good one? Mr Harris shared tips on how to find the right property manager.
“Shop around, arrange rental appraisals for your property (this should be free), find out how many properties are directly under their management (the fewer they have, the more time they can dedicate to your property), do they conduct property inspections personally, or do they outsource this function?” he said.
He also advised not to go bargain hunting on property managers — as with anything, you tend to get what you pay for.
Lastly, Mr Harris advised investors not to get discouraged if poor choices are made along the way. “[If] you don’t get it right the first time, then it’s actually fairly easy to change!” he said.
Article source: www.smartpropertyinvestment.com.au