Barefoot Investments

The 6 Steps to Buying an Investment Property

Barefoot has always had reservations about investing in property, however if you do choose to invest in property, here’s what to look out for:

1. Pick Location

* Vacancy rates are at record lows, but they can’t stay there forever. This means you need to plan for the likelihood that good tenants will not be so easy to find in the future. Buying property that is well positioned is one of the best ways to attract tenants.
* Safety, cleanliness and the local environment also add to the ability to attract good tenants.
* Proximity to transport, shops, schools and entertainment are all important considerations.

2. Pick Quality

* Keeping maintenance to a minimum is a must. Make sure construction is sound and outbuildings and gardens are in good order.
* Factors determining the quality of the property will vary according to the target market. Families will generally require three-bedroom homes; inner-city flats should be safe and secure.

3. Pick Returns: gross v net

* Rent is your gross return (or yield), but you then have to deduct all other expenses to reach a net return.
* A rule of thumb to use as a guide is to deduct 25 per cent from rent to cover all other costs (rates, insurance, maintenance and body corporate levies for apartments).

4. Vacancies

* For each vacant week, allow for a loss of about 2 per cent in gross returns.
* About 30 per cent of Australians are renters, and that figure is growing because of the credit crunch and low housing affordability. More potential first homebuyers are delaying their purchases and renting for longer.

5. Tips for success

* Apartments can provide better value than houses because entitlements for depreciation (on purchase price, construction price and land value) are better.
* An economic downturn can be a good time to buy a property because it’s a buyer’s market, prices are lower and there is often some room to negotiate the price down.
* If you have your properties revalued annually, the additional equity can be used to negotiate mortgages for further investments (provided there has been capital growth in the previous 12 months).

6. Traps to avoid

* A "renovators dream". Maintenance is too high.
* Long periods of vacancy
* Don’t pay too much
* Low rent locations
* Don’t buy in an area with limited potential for capital growth
* Take advantage of all tax deductions, see your accountant.
* Make sure your mortgage is properly structured – you should be negatively geared where appropriate, and paying off interest only

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