10 Essential Tips for the Novice Property Investor
You have to consider all sorts of questions when you decide to become a property investor. In addition to asking yourself “how much can I afford to spend on a property?”, you have to think about how you’ll manage the property during your ownership.
You have all sorts of options available to you if you decide to start investing your money. Stocks and shares may seem attractive at first. After all, if you get it right, you’ll generate huge returns. However, they also carry a lot of risk, which novice investors are wary about taking on. As a result, you’ll find that many new investors look toward the property market.
So why is property a great investment?” Beyond offering long-term returns, especially if you take steps to improve your yields, you can also use your property to lower your tax bill. There are many more advantages of property investing, but you probably already get the general gist.
However, generating a return through property investing is not guaranteed. It’s still possible to make mistakes that could result in you losing money. To avoid losses, you have to manage the property well.
Novice investors often struggle with this. To help you along your way, here are ten tips that all novice property investors should know.
Tip #1 – Get Handy
Many new property investors don’t consider the cost of maintenance when they make their purchases. They may ask themselves “what are the additional costs involved in buying property?”, only to completely forget about the hundreds, or even thousands, of dollars they may have to spend once they own the property.
Your property will undergo wear and tear during its life. Tenants may damage things, and the property will require maintenance as it ages. Sure, you can call in the professionals to sort this out for you. However, that’s money out of your pocket.
Instead, prepare yourself for investment property ownership. Learn about some of the common maintenance issues that property investors have to deal with. If you can become handy with a set of tools, you may find that you can fix a lot of things yourself. Even something as simple as knowing how to unclog a toilet could save you hundreds of dollars over the course of your investment.
Tip #2 – Know Your Budget
Before you start your investment journey, you need an answer to the question “how much can I afford to spend on a property?” This is crucial to your success. Yes, that expensive beachfront property will probably attract tenants in no time at all. However, are you sure that you can handle the cost of maintaining it?
The key here is to create a budget that doesn’t eat into your personal living expenses. The moment you start sacrificing your own life for your investment, you place yourself in financial danger. Your risk of defaulting on your home loan increases, as you become increasingly reliant on your investment property’s rental yield.
Budgeting accurately can help you to avoid these struggles. Get pre-approval from your bank, so you know how much you have to spend. Most importantly, don’t give into the temptation of going over your budget to buy a property that you’ve fallen in love with. Remember that investing is a business. If you don’t treat it as such, you’ll set yourself up for failure.
Tip #3 – Get Rid of Existing Debts
Experienced property investors can use their debt to their advantage. For example, they can use negative gearing to benefit from the losses they make on their investments.
However, you aren’t an experienced investor, so you shouldn’t be thinking about using your debt to boost your portfolio. Instead, you should focus on getting yourself on the investment ladder with as few debt-related hang-ups as possible. That means getting rid of your existing debts before you commit to a mortgage on an investment property.
Unpaid student loans, credit cards, and personal loans are all debts that you could do without when investing in property. After all, they will take hundreds of dollars out of your pocket each month. That leaves less money for you to dedicate to your investment property. Having existing debts also makes it harder to secure a home loan. As a result, you should clear as much of your debt as possible before you consider property investment.
Tip #4 – Look for Growth Areas
The “where” is often as important as the “what” when you’re looking for an investment property. Buying in the wrong location means you set yourself up for failure from the beginning. If there is little demand from tenants in the area, you’ll have to spend more money on making your property an attractive proposition. That’s even before you get into the additional marketing costs.
Search for established and growth areas to avoid this problem. Speak to local real estate agents to find out which areas experience the highest tenant demand. Focus your search on these locations and the surrounding regions.
Also, consider what the area itself has to offer to prospective tenants. Properties that offer easy access to schools will attract more families, while small units near a university should attract students. Consider the local amenities, and your property’s proximity to them, before settling on a purchase.
Tip #5 – Understand the Changing Property Market
You should head into every investment with a plan. However, you also need to understand that your plans will change along with the current property market.
So how does this affect you? Well, buying during a boom period will ensure your property enjoys high demand. This means higher rental yields, which you can put back into the property. However, you’ll also have to pay more to secure the property in the first place. Buying during a slump means you invest less upfront. However, you’ll have a harder time attracting tenants, and not as much free capital as you may need to invest in the property.
The point is that the property market changes, and you need to change with it. Build some flexibility into your investment plan. This will allow you to weather the storm during downturns, so that you can take full advantage of boom periods.
Tip #6 – Always Check the Home Loan
Many novice property investors make the mistake of assuming that lenders will offer the same interest rates for investment loans as they do for residential loans. That’s rarely the case. You need to prepare yourself for higher interest payments if you want to buy an investment property.
Furthermore, most lenders ask investors for a higher deposit. These less favourable loan terms have a purpose. Lenders class investors as a greater risk than residential borrowers. After all, if you don’t live in the property, you may have less reason to fight for it if you run into financial trouble. It’s far easier to cut and run.
As a result, you should always read the fine print on your home loan offer. Do not base any decisions on information that you gleaned from searching for a residential home loan. Investment mortgages are different, and you need to account for that fact.
Tip #7 – No Emotion Allowed
Investing is a business. If you treat it as anything less, you will fail. This is a problem that many novice property investors have to deal with. They shop for investment properties in the same way that they did for the homes they actually live in. This results in them focusing on the little luxuries and touches that make them fall in love with a property.
That won’t serve you well when you’re buying an investment property. Simply put, it doesn’t matter how attached you get to a property. What matters is how much that property will appeal to your prospective tenants.
Always remember that you’re not buying the property for yourself. It’s a money-making tool that must meet the needs of local tenants.
Tip #8 – Avoid the Bargain Basement
You’ve heard all of the property flipping success stories. People get their hands on a property for very little money, invest a few thousand dollars into renovations, and generate a massive return when they sell on the property.
It’s an attractive story for many novice investors. However, it’s also one that’s fraught with danger. Remember that you’ve never owned an investment property before. As a result, you don’t know about all the hard work that goes into maintaining it, never mind renovating it. You have to find suitable contractors, and have an in-depth understanding of the local property market to successfully flip a property.
As a result, it’s best to avoid buying cheap for your first investment. Instead, get an established property in your portfolio and build some experience. Over time, you’ll come to understand the market well enough to consider buying cheaper properties with the aim of renovating them.
Tip #9 – Be Comfortable With Your Current Home Loan Repayments
You don’t need to have repaid your existing home loan before you start investing in property. In fact, many novice investors rely on the equity they’ve built in their properties to fund their investments.
However, you must feel comfortable with your current home loan repayments before you consider investing. If you’re struggling to deal with your debt right now, you’re only going to add to your woes when you invest. In an ideal situation, you’ll have repaid a large portion of your home loan. This leaves you with smaller monthly repayments, which you should be able to handle easily.
Also, don’t assume you’ll be able to cover your investment property’s loan repayments with the money the property generates. Those first few months of repayments will usually come out of your own pocket while you’re getting the property ready for new tenants. If you can’t handle them comfortably, you risk losing the property.
Tip #10 – Always Get a Building Inspection
It’s remarkable how many novice property investors miss the little things in their rush to sign an agreement. They see a great deal, and try to push it through as quickly as possible. That could mean that building inspections go undone before the signing of the purchase agreement.
Always have any property that you intend to buy as an investment professionally inspected. Yes, it’s another upfront cost. But the results of a proper inspection could save you thousands of dollars.
You won’t lament the loss of a few hundred dollars if the inspection shows structural issues that would have ruined the investment.
Property investment may be one of the most reliable investment types around. However, that doesn’t mean you can treat it flippantly. If you don’t put the time and effort into finding a good property, you will lose money.
Read these tips before you start your search. They’ll help you to understand what you’re letting yourself in for when you enter the world of property investment.