Top 10 tips for Investing in properties

Top 10 tips for investing in property

Real estate can be a highly lucrative industry with it has produced many of the world’s wealthiest people. Buying an investment property continues to be a way to increase your wealth and secure your financial future. The general misconception is that property investment always produces positive returns, while the reality is that it isn’t an easy road to riches. How effectively you manage your investment may determine how well you do in the market and as it ties into your returns. Here are 10 tips to consider when investing in property.

Know your objective

It’s important to know what are you trying to achieve by purchasing an investment property. It could be to generate much-needed income to supplement your pension for retirement, or a place to safely place your savings. Some people invest in property in order to ensure their children have a place to live in, in the future. Once you have clarified your reasons for investing, consider how much you are able to put on one side for that length of time.

Work out your budget

Investing in the property must be seen as a medium to long-term investment path, to long-term wealth. If you’re thinking about buying a property, the first thing you need to do is be realistic about your cash flow and what you can afford based. It’s important to ensure that you can afford to maintain your mortgage repayments and other expenses pertaining to the property over the long term, taking into account your expected rental returns.

The idea is to be in a position where you don’t have to sell your investment property unless and until you are good and ready. Not taking the serious nature of having a sound budget into account could force you into offloading the property at the wrong time, in most cases, resulting in a loss.

Secure a Down Payment

Investment properties generally require a larger down payment (deposit payment?) than owner-occupied properties. You may need at least a 20% down payment, given that mortgage insurance isn’t available on rental properties. You may be able to obtain the down payment through bank financing, such as a personal loan.

Select a preferred suburb.

The last thing you want is to invest in a property that’s in an area under decline, rather than a stable area or one that’s quickly developing. A location where the population is growing or there is a revitalization plan underway potentially represents a great investment opportunity. Proximity to a CBD, other major employment hubs, or amenities such as easy access to public transport; hospitals; schools, and major roadways, will drive demand and capital growth.

It’s also important to understand the market and the dynamics where you are buying. To get a better understanding of an area, one would do well to speak to as many locals and real estate agents as they can. From this, you’ll get insight into whether one side of a street is considered superior to the other. By talking to these groups, you get invaluable information on average rents, property values, and demographics of that area.

Determine a property type

Your budget and location will often dictate the type of property that’s right for you. However, don’t forget to take into account the features that are in demand by prospective tenants in that area. You must ask yourself what’s more popular in the area between an apartment and a house, or if your tenants want a garage or if roadside/street parking will suffice. Prospective tenants might want a yard or garden area. Think about what’s important for potential renters and choose accordingly

Know the law and Invest in rental insurance

Rental property owners must be familiar with landlord-tenant laws in their region. It’s important to understand your tenants’ rights and your obligations as a property owner regarding security deposits, lease requirements, and eviction rules in order to avoid legal hassles.

You can protect your new investment by getting landlord insurance. It’ll be of great benefit to consider purchasing rental insurance. This type of insurance generally covers property damage, lost rental income, and liability protection. Liability protection is in place for instances where a tenant or a visitor suffers injury due to a property maintenance issue.

Check the age and condition: Avoid a Fixer-Upper

You might find a property that might seem like a bargain, and you might be tempted to take it and flip it into a rental property. However, if this is your first property, that’s probably a bad idea. Having to replace the roof or hot water service in the first couple of months of ownership could significantly affect your profits and your cash flow with it.

Contractors who provide high-quality work are rarely found on the cheap side of the spectrum, leaving you with the highly likely prospect of paying large sums to renovate the property. It’s advisable to engage a professional building inspector before you purchase any property to conduct a thorough inspection of the property to find any potential problems.

It’s not always bad to buy an old or out-of-date property as you can improve the value of the property by undertaking renovations. In the long run,  you can increase your returns for both capital growth and rental income.

If you want to further investigate, we wrote a blog on how to do a home assessment.

Start small with low-cost property

If you aim to have a number of rental properties under your belt, start off with one property. This will give you practice and insights into the industry that you would only get when you’re a property owner. When you’re comfortable with the processes of being a property entrepreneur, buy another.

Assessing Risks and Challenges

Investing in property, like any investment, carries its own set of risks and challenges. One of the most prominent is market risk, where property values may decline due to economic downturns or changes in neighborhood dynamics. The property may sit vacant for extended periods, affecting your rental income and cash flow. Should this happen, you’d still need to cover the mortgage, taxes, insurance, and maintenance costs out of pocket.

Furthermore, property investment requires substantial capital outlay upfront, and it can be more difficult to liquidate compared to other assets. The process of selling a property can be time-consuming and costly, and in a sluggish market, you might not fetch the price you want.

Unexpected maintenance issues pose another challenge. While regular wear and tear are to be expected, serious issues such as structural damage or costly repairs can quickly eat into your profits.

Lastly, regulatory risks are also a factor. Changes in legislation, such as rental control laws or zoning laws, can impact your investment returns. You must always stay abreast of any legal changes that could impact your property.

Tax Implications of Property Investment

Investing in property can carry significant tax implications which are important to understand. Firstly, you should be aware that rental income is considered taxable income. This means that any rental payments you receive from your tenants must be reported on your tax return. However, the expenses you incur as a landlord, such as mortgage interest, property taxes, insurance, maintenance costs, and depreciation can often be deducted from this income.

Another key tax consideration pertains to capital gains. When you sell an investment property for more than you paid for it, you’ll likely need to pay capital gains tax on the profit. The rate of this tax depends on several factors including your income level and how long you’ve owned the property.

Importantly, tax laws can vary greatly depending on your location, so it’s essential to consult with a tax professional or accountant who is familiar with the tax laws related to property investment in your area. They can provide tailored advice and help you take advantage of any available tax benefits, such as deductions for energy-efficient improvements or professional property management fees.

Indeed, while taxes can represent a significant cost of investing in property, with good planning and advice, they can be effectively managed to enhance your overall returns.

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