6 questions to ask before investing in real estate
Investing in property can be an excellent way to build wealth for your future. To make the most of it, don’t let your emotions get in the way of a good deal. By knowing the questions to ask before investing in real estate, you can set yourself on the path to financial security.
If you’re buying a home to live in, you can afford to let your heart have a say. After all, you’ll be coming home to that front garden or gorgeous facade every day. Provided it’s within budget, you can always choose to pay a little extra for something you truly love.
For investors, though, the numbers really do have to stack up. The advantage of investing in property is that the rental payments you receive will pay for your running costs, or close to it. That frees you up to build equity with very little outlay from your income. Accordingly, it’s important that you approach the process sensibly, using your head instead of your heart.
Before you leap into this exciting new journey, here are six questions you should be asking.
1. What are my investment goals?
Before you even start to look for an investment property, get clear on your goals. Are you investing for cash flow or capital gains? Are you intending to buy, renovate and sell the property (known as flipping) or do you plan to hold onto it for the long term?
Your goals will determine what type of property is right for you, and in which location.
“Houses have historically realised greater capital gains than apartments,” explains Mark Wolens, Executive Director for Independent Property Group Woden and Weston Creek.
“However, because units are a more affordable way to buy property, you can often achieve greater rental returns. It really depends on whether you want the cash flow now, or the profits later.”
2. Is cash flow a concern?
If you’re investing to flip, you’ll be looking for a home that needs some serious renovation. Flippers typically buy older, run-down properties, renovate the interior, and then sell them on for a profit. To make this strategy work, you’ll need to carry the debt on your own while you undertake the renovations.
On the other hand, if you want to be achieving income earlier, the property should be in good condition from the start.
“You’re losing money for every week that a rental home stands vacant. If cash flow is a concern, look for somewhere that’s move-in ready. A brand new property is ideal: nothing needs doing to it, and all the appliances will be under warranty,” says Mark.
If you’re set on a fixer-upper, make sure it only needs cosmetic improvements. Paint work and some floating floorboards can be installed relatively quickly. If there are structural issues, though, your investment property could be standing vacant for several months.
3. Do the numbers fit into my budget?
Investing in property is a big step. It makes sense to make sure you can afford it before committing to the decision.
First of all, do you know what your purchasing budget is? It’s a good idea to talk to a mortgage broker ahead of time and find out how much a bank will lend you.
When you’re looking at the asking price of a house, make sure to calculate all the purchasing costs. Conveyance duty exemptions don’t apply for investment properties and can add a substantial amount to the final price. You can calculate how much this will be here.
Secondly, what are the ongoing expenses? The mortgage payments will be your largest expense, but not your only one.
You may also have to pay all or some of the following:
- Landlord insurance
- Building insurance (if you own a freestanding property)
- Strata fees (if you own strata title - in this case, building insurance is included within the fee)
- Maintenance and repair costs, which will vary a lot depending on the type and age of property
- Rates and taxes
4. What is the rental return?
Now you know how much the property will cost, you need to know how much it will earn.
“A real estate agent can help you understand what the likely rent will be,” says Chris Uren, Executive Director for Independent Inner North and City.
“Independent is a full-service firm, so we can handle the property management as well as the sale. We will look at comparable properties and give you our best estimate as a rental appraisal. Often, we’re handling multiple units within a single complex, so we can be pretty accurate.”
You can also do your own research using real estate websites like Allhomes. Search for comparable properties, which are those in the same area, same size and similar condition, to see what rent they’re asking.
To achieve a neutral cash flow position, your goal is to find somewhere where the rental return covers all your running costs. More commonly, there will be a shortfall that you need to cover from your own pocket. While that shortfall is tax deductible, the initial outlay still lies with you.
5. Are there funds in the strata account?
If you’re buying an apartment, unit or townhouse, you’re almost certainly buying into a strata complex. This means that you pay strata fees.
Some of that fee pays for ongoing costs, like utilities and garden maintenance to common grounds as well as building insurance. Another portion goes towards the ‘sinking fund’, which should build up ahead of larger expenses like replacing the HVAC system or repairing the roof.
Ask to see the minutes of the last few strata meetings and the financials to see:
- Whether there are any known structural problems, like concrete cancer
- Whether the complex is in good financial standing, and doesn’t have any outstanding debts
- What the balance of the sinking fund is and whether that’s appropriate for the type of building
6. Can I manage the property myself?
Professional property managers charge a percentage of the rental return as their fee. For new investors, the idea of managing the property themselves can therefore be very tempting. Save on costs and maximise your returns: it’s a no-brainer, right? Not so fast.
To manage the property yourself, you’ll need:
- The spare time, which might include fielding phone calls in the middle of the night or waiting around all day for a trade to come and do a repair
- Up to date knowledge of rental legislation
- Marketing skills to allow you to attract the right tenants
- Organisational skills to ensure you get paid on time and follow up promptly on late payments
- Interpersonal skills, since you’ll be dealing with questions and requests on a regular basis
And that’s just when things run smoothly. If they go pear-shaped, you’ll quickly find out the value of a property manager.
If you’re not sure about investing in real estate, knowing the right questions to ask can put your mind at ease. Real estate agents and property managers are always happy to have a chat with prospective buyers. Their wisdom and experience can help you go a long way..