5 Tips to Invest in Small Properties
Buying an investment property continues to be one of the country’s favourite ways to invest. Even when it comes to investing in small properties, it should be about increasing your wealth and securing your financial future. There is however, a common misconception that small property investing always delivers positive returns, while this is true most of the time it certainly isn’t an instant road to riches. You need to keep in mind that how effectively you manage your investment will determine whether or not the investment helps you reach your financial goals.
Here are a few tips to get started:
Tip #1 Choosing the right property at the right price
Unlike buying shares where the value of a company is transparent, real estate is more difficult to price, this however provides you with the opportunity to acquire an asset below its real market value if you are patient and knowledgeable. The key for you is to do your research, work out what everything is selling for in and around the area and then you’ll discover that soon you’ll become very good at working out what a property is worth – you’ll know a bargain when you see it.
You probably aren’t aware but lenders and mortgage insurers have valuable data on different locations and property developments and you should try and access this information to assist you to avoid picking the wrong investment property. Whatever you do, never make a decision to buy an investment property based on getting a tax deduction – always focus on making the right investment choice.
Different classes of residential property – home units, houses and land – can outperform each other over time. For example, vacant land will provide no rental income but may appreciate more quickly if purchased in an area with limited supply. Investing in a home unit might mean less maintenance costs than investing in a freestanding weatherboard house. Some areas offer higher rental yields, but it is important that you do your homework as often these properties provide lower capital growth opportunities.
Tip #2 Do the math – cash flow is always crucial!
Investing in property is a proven path to long-term wealth, however you should consider it a medium to longer term type of investment, so you’ll want to make sure that you can afford to maintain your mortgage repayments over the long term. You will not want to have to sell your investment property until you are good and ready and if you were to encounter some financial stress, this could force you to offload the property at the wrong time.
Once you own an investment property it can be quite inexpensive to keep it and service the loan, that’s because you earn rent and get a tax deduction on many of the expenses associated with owning the property and remember that over time rents tend to increase as does your own income – so expect things to get easier over time.
Make yourself aware of taxes involved in property investing and add these into your calculations. Advice from your accountant is vital in this regard as these can change over time. Stamp Duty, Capital Gains Tax and Land Tax all need to be taken into account. Remember that interest rates can vary over time but the good news for property investors is that in times of rising interest rates you can normally expect to be able to increase the rent.
Tip #3 Check the age and condition of the property and facilities
Even with negative gearing, needing to replace the roof or hot water service in the first few months of ownership could make a significant difference to your profits and really damage your cash flow.
It is therefore advisable to engage a professional building inspector before you purchase and then once a year to conduct a thorough inspection of the property to find any potential problems.
It is also wise to use a qualified tradesperson who is licensed to carry out the work and who has adequate insurance to protect you against poor workmanship.
It’s not always a bad thing to buy a property that is not in peak condition because you get the opportunity to improve the value of the property by fixing the place up and this can increase your returns for both capital growth and rental income. Now you can’t do that when you buy shares.
Tip #4 Make the property attractive to renters
Go for neutral tones and keep the kitchen and bathroom in good condition. You’ll find that you will attract better quality tenants if you have a well presented property and the last thing you want is a bad tenant.
Another point that is subject to debate is whether you should buy a property that you’d be happy to live in yourself. Some people believe this will mean it is appreciated more and some people don’t care. However, think about differentiating between your own home and your investment to avoid becoming overly involved; remember it is the home of your tenant and not your own.
For me it is important to remember the day will come when you’ll want to sell the property and if a home is appealing to not only property investors but also owner occupiers you’ll have a wider market for the property and this will maximise your selling price. I think that owner occupiers are willing to pay a little more for the right property because it becomes more emotional rather than a logical purchase.
Tip#5 Take a long-term view and manage your risks
Remember that property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better and as you build up equity then you can consider purchasing a second investment property – try not to get too greedy and find the right balance between financial stability and still being able to enjoy life. Financial security is very important but life is not just about mathematics.
Finally, remain aware that unlike shares or managed funds, you can’t just sell part of your investment property if you need money. In short, be cautious, but consider that record migration levels and a rental property shortage are crucial factors favouring investing in property.
So if you’re interested in knowing more about real estate investment, consider inquiring about other possibilities with LYONS Realty Corp., a trusted brokerage firm in the Philippines dedicated to providing fresh perspective and ideas for a new approach in providing top-notch service to every real estate client. Contact us today and get your dream home in no time.