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Article | 4 minute read

Things to consider before becoming a property investor

Investing in property can be rewarding but there are several things you should consider before you take the leap!

What are your financial goals?

Before starting an investment property portfolio, be clear with yourself about why you’re investing, what you’d like to achieve and what timeframe you’re looking at. Your financial goals will determine if and when you should expand your investment property portfolio and how much risk you should take on.

Most importantly, consider whether investing in property will help you reach your goals better than investing in other asset classes, such as shares.

When you have clear financial goals, you can turn them into a plan that guides your decisions on what type of property you could buy and when.

Do you understand the risks?

As with any investment, investing in property comes with risks. While there are ways to reduce these risks, it’s good to understand what the risks are and what level of risk you’re willing to accept.

Capital growth is hard to predict

Property prices in certain parts of Australia have grown in recent years over the long term but consistent price growth isn’t something you can count on or expect indefinitely. You might have growth in some years and prices might fall at other times.

Rental income is not a sure thing

You could face vacancies or tenants who default or cause damage to your property. Think about whether or not you can maintain home loan repayments if you don’t have a tenant for certain periods. You could consider landlord insurance to help manage this risk.

Understanding your risk profile

Knowing where your limits are helps to ensure you’re not overextending yourself financially and can help you put buffers in place in case your circumstances change.

Can you afford the repayments?

Property investment is for the long-term. Even if you’ve bought the right property in the right area, it may still take some time before you see growth in value, if at all.

Part of investing in property is being prepared and able to hold your property long enough to turn a profit, so consider what would help you stay in it for the long haul. If you aren’t able to make repayments, you might have to sell the property prematurely. At best, this might mean not hitting the target profit margin you’ve set for yourself. The worst case would be having to sell at a loss if the property market is down.

Being a successful property investor means having enough cash flow to afford repayments. Remember to consider interest rate fluctuations when assessing whether or not you can afford to buy one or more investment properties. You might be in a strong position if interest rates are low but what happens when interest rates rise? Use our repayments calculator to help you work this out.

Be realistic about what such a financial commitment would mean for your lifestyle in the next five to 10 years, and consider if you’re willing to make these compromises.

Can you cover maintenance and ongoing costs?

Besides home loan repayments, there are other costs associated with owning an investment property.

Make sure you budget for costs such as council rates, owner’s corporation levies for strata properties if applicable, property manager fees and other ongoing expenses.

You might also want to consider the age and condition of your investment property and whether you can afford the likely maintenance over the years. Often people budget for regular repairs and maintenance but sometimes don’t have enough set aside for big ticket issues such as roof repairs or replacing hot water systems.

What’s more, there are the costs of finding a new tenant, such as advertising, that you’ll have to cover every time a tenant leaves.

Are you willing to pay lenders mortgage insurance (LMI)?

Generally home loans can fund up to 85–95% of the value of your home. However, if you have less than 20% equity, it’s likely you’ll have to pay lenders mortgage insurance (LMI). LMI protects your lender if you were to default on your home loan.

Some investors choose to wait until they’ve saved enough cash or built up enough equity to cover the deposit on their next investment property. However, that might mean waiting a longer period between property purchases.

If you’d like to strike when an investment opportunity presents itself, you can consider using the equity you have in your existing property (if applicable) and paying LMI in order to expand your property portfolio sooner. As always, you should weigh up the risks and seek advice from your financial adviser and registered tax agent as to whether such a strategy is appropriate to you to make sure you’re not overextending yourself.

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