10 tips for buying your first rental property
Make this year the year you get serious about building wealth. Buying a rental property can be a fantastic investment in your future. If you choose wisely, you can enjoy passive income for years to come while your investment makes steady capital gains. You can move into it down the track, sell it for a nest egg or use the income to supplement your eventual retirement - the choice is yours!
When you’re starting out, it can be daunting to know what you’re looking for.
We’ve put together our top tips on buying a first rental property, with help from Phil Smith of Independent Inner North and City and Monika Minko, Senior Leader of Property Management at Independent. Phil has been helping people buy and sell Canberra property for 8 years, while Monika is the undisputed expert on helping you get the most from your rental property.
1. Calculate the cash flow
Cash flow is literally the cash that flows to and from the property. Cash flows in in the form of rental payments. Cash flows out to pay the running costs, which include mortgage payments, rates, utilities and strata or body corporate fees.
In the early years of owning an investment property, it’s common to make a small loss because the rent doesn't cover the entire mortgage payment plus additional costs. As your mortgage decreases and the rent rises, you’ll first break even and then make a profit, but this can take some time. That’s why it is vital that you know what the cash flow will be. If there is a shortfall of $100 per week between your rental income and running costs, you need to be confident that you can find the money in your budget before making the commitment.
Phil says it’s always a good idea to talk to a broker before you do the sums. “We’ll put buyers in touch with a mortgage broker so that they can work out the cash flow. We’ve also got all the information they need about rates, strata fees and land tax so that they know exactly what they’ll have to pay.”
2. Understand depreciation
If your investment property costs more to run than it produces in income, you can deduct the difference against your overall taxable income. This is known as ‘negative gearing’.
One way to maximise your deductions is by claiming depreciation. All the structural elements, fixtures and equipment in your investment property, from carports to carpets and from balconies to blinds, will eventually degrade and need replacing. Depreciation allows you to claim that wear and tear as an annual deduction.
Depreciation is a complex area, with predetermined rules set out by the Australian Taxation Office and different methods you can choose for claiming a loss. From July 2017, investors can’t claim depreciation on second hand plant and equipment, for example, but they can do so for brand new items. That can make an off plan purchase more tax-friendly than an established property.
“It’s a great idea to talk to a depreciation specialist like BMT when you’re doing your sums,” suggests Phil. “Especially if you’re buying off plan, there are plenty of things you can claim. To maximise your claim, you’ll need a depreciation schedule. It makes a huge difference to your bottom line, so talk to someone early. We’ll happily refer you along.”
3. Choose a property that fits your goals
Before buying an investment property, get clear on your goals. Some types of real estate are better for positive cash flow, which is ideal if you want something that will supplement your income sooner. Others might cost you a bit more to run but will also increase more in value. If your plan is to sell it for a profit later, this might be where your focus is.
Irrespective of your strategy, some properties will always make better investments than others. Consider things like rental demand, ongoing upkeep, property values over time and location to make sure you’re choosing something that will attract a reliable supply of tenants.
“Canberra is a good place to invest, regardless of where you are based,” Monika says. “As long you’re close to amenities and local shops it doesn’t need to be a main town centre. It depends on your goals. Are you looking for an investment that will be cash positive, or one you can negatively gear to offset your tax? Some of the newer apartments offer positive cash flow right from the beginning with great rental returns, so that's definitely a possibility in the Canberra market.”
4. Talk to a property manager early
A property manager can help you attract, vet and install a tenant into your investment property. But did you know that they can help even before you’ve bought a place? As experts in the area, they’ll be able to tell you what kinds of property tenants are looking for, where the best locations are and what rental demand to expect.
“We’re always happy to help with advice,” says Monika. “We can tell you where the highest demand is and pass on what tenants are telling us about their needs. We can’t give you financial advice, but we can tell you what rent you can expect from various properties.”
5. Focus on location
If you want to attract tenants, location is key.
The perfect location depends on the type of property and what type of tenant you’re looking for. A stylish new off plan apartment for young professionals, for example, will be more attractive if it’s close to the city, good restaurants or entertainment. If your purchase is a four-bedroom house in the suburbs, attract families by choosing somewhere close to schools, parks and public transport.
Monika explains. “The tenant demographic in Canberra is so diverse that every property will appeal to someone. Still, if you’re looking to buy, it’s worth thinking about what the property is going to lend itself to. If you want to attract families, do you need to be in particular school zones? If it’s a one bedroom apartment that will appeal to young professionals, is it easy to commute to the CBD?”
6. Put yourself in the tenants’ shoes
Once you’ve got the location down, think about what the property has to offer.
Before you buy, ask yourself what you’d want if you were a tenant. Remember that most tenants don’t plan on staying somewhere forever, and don’t have the same attachment to the property as a live-in owner.
“There are definitely things that tenants look for when they’re choosing a property,” says Monika. “A nice kitchen and bathroom are a huge plus. But as long as it’s fairly modern and presents well, there’s no need to go overboard. Air conditioning and good heating are practically mandatory these days. Nobody wants to shiver through a Canberra winter!"
Complexes with a swimming pool or a gym are also in high demand since they give tenants access to extra amenities without the upkeep. “Parking is an increasingly important consideration,” adds Monika. “A lot of people rent as a couple and own two cars, but their apartment might have only one parking spot, or none at all, so it’s an important aspect to consider.”
7. Look for something low maintenance
You don’t want to spend every weekend over at your investment property doing repairs and your tenant doesn’t want you there either. A property that needs a lot of maintenance can eat into your bank balance, your time and your peace of mind.
“A brand new property is ideal for investors,” says Phil. “It’s ready to move into, and everything inside it will be under warranty for the first few years."
If you do have a higher maintenance property, though, there are things that can be done.
“When we deal with properties that are higher maintenance, we often negotiate with tenants to help meet their needs,” says Monika. “For example, a property with a large garden or a pool. Those are technically the tenant’s responsibility, but if they don’t want the hassle, we can negotiate a little bit extra in the rent to pay for a gardener or cleaner to come in. That way the property remains in good condition and the tenant gets the benefit of the extra amenities without the hassle.”
8. Don’t jump in feet first
Do your due diligence before putting in an offer, every time. It doesn’t matter if you’ve fallen in love with a particular property, or you made a promise to yourself to buy before the end of the financial year. The extra time and care taken will always reward you.
Some things you should do before signing on the dotted line include:
Getting a building inspection. This will assess the property’s condition and tell you if anything needs attention. Combine it with a pest report for a really thorough overview.
Checking for other developments in the area. That lovely view might be under threat from a huge new shopping centre, or there might be planned infrastructure that can really help your property value.
Check the neighbours. Monika says: “the property might be lovely, but if next door looks like a junk yard it may put potential tenants off.” Also, make sure that there are no ongoing disputes. The seller may not have to disclose a bad neighbour situation unless it’s progressed to the courts, but it’s worth asking the real estate agent — and your friendly local search engine — what they know.
“We’ve got a broad view of what’s out there and what’s coming up’, says Phil. “If there are plans for a new shopping centre, or that eyesore next door is about to get knocked down and rebuilt, we’ll know about it before anyone else does.”
9. Be prepared to negotiate
“The problem for investors is that they’re up against live-in owners in a tight market,” Phil says. “People are buying to live in the property are often prepared to pay more. They see the property and form an emotional attachment to it. That’s worth some money to them, so they make a higher offer. Investors, on the other hand, want a good deal so that they can make a profit right off the bat.”
What does that mean for you? You can always prepare yourself for paying more. But Phil’s advice is to look for properties that don’t come with the same emotional investment. “An off plan property always attracts investors,” he says. “They don’t have the same quirks that lend them rarity, and you can take your pick of options.”
10. Get loan pre-approval
Loan pre-approval puts you in a far stronger position. Especially if you’re buying at auction, where the contract is unconditional, you need to make sure that you’re not promising money you can’t really pay. Get the paperwork done ahead of time and you can raise your hand with confidence.
For a list of off plan developments that could be the perfect investment for you, visit our buying off-plan page.
If you’re wanting some investment advice or looking for a property manager to look after your new investment, fill out the form below and we’ll be in touch soon.
*Independent is not a financial advisor. The information contained is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before making any commitment of a legal or financial nature you should consider the appropriateness of the information having regard to your circumstances and needs and seek advice from a legal practitioner or financial or investment adviser.
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