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Empower Wealth Blog post by Empower Wealth

A Home Is Not Just a Home: The Process of Buying a Home with an Investor’s Mindset (Part 2) 

>> Click here to read Part 1

Firstly, why Invest Your Money in Property?

Before we move forward, we need to look into investors’ mindset and understand why they choose to invest in property? Property investment is one of the places Australians turn to when looking for ways to grow their portfolios because of numerous benefits such as low volatility in risk as compared to the stock market. Not only is it the most forgiving type of investment (as even in purchasing an area’s worst house, the value will still likely increase as time passes), it’s also the only investment market that is not dominated by investors. On top of that, you can potentially earn a steady stream of rental income and potentially, make a solid profit when selling it in the future. And finally, you have much more control on the value of the property because it is 100% yours. When the time is right, you can choose to add value to the property via simple refurbishments or bigger renovations. These value adds and the loan interest incurred are also tax deductible.

Changing your Home to an Investment Property 

There are certain things that will make owning and maintaining an investment property different from owning a home you plan on keeping indefinitely. First off, you’ll want to have a timeline in mind for when you will want to upsize or downsize. This decision will be based on your personal circumstances ie: moving to a preferred choice of high school for your children, the state of the housing market or when you will be able to maximize your profit margin. Having a rough estimate on when you would like to do the transition will also greatly assist in your property selection stage because you would know what factors of the property you are willing to compromise on, as part of your long term plans.

Property Manager

You’ll also want to carefully handle property management; you can decide whether to handle the management yourself or hire a property manager to take care of the generalities. At Empower Wealth, we always recommend our clients to use a property manager. You might think that you know the property more because you have lived in it for some time but a property manager offers much more benefit than that. To start with, a property manager understands Tenancy Laws better than you. They are able to draft the contract right and include the areas that you want to focus on without violating the tenant’s rights. Other pluses include not having to worry about day-to-day issues and things such as finding tenants, scheduling maintenance, keeping on top of rental payments, etc. Regardless of whether you hire out or handle it yourself, you’ll need to keep on top of your legal responsibilities as a landlord.  Not to mention, an experienced property manager also knows what to look for in assessing a tenant and their rental application. Furthermore, they are also more familiar with determining if a tenant’s ongoing requests are worth an action or not.

Looking for a property manager shouldn’t be taken lightly. After all, they are working for you and in a sense, you are giving them a level of control over your asset. You want a property manager to notify you immediately if the tenant is not taking care of your property, to let you know when it is the right time to raise your rent and most importantly, they are not afraid to confront the tenants on late payments. So how do you find a worthy property manager? Well, like every other job in the world – you conduct an interview. Talk to them, ask how many properties are they currently managing, what area are the active in, what would they do in certain situation, how much they charge and most importantly, ask for referrals. You want a property manager that you can trust and are comfortable with so don’t be afraid to interview a few before finalising on one. If you have engaged a buyers agent, you can also ask them for recommendations.

Rent Considerations

Rental rates are influenced by many factors. Suburbs with a high population growth will be highly prized, as with this comes increased desirability and improved infrastructure. Buying within a city or within close proximity to the CBD brings the potential for capital gains but at the same time, the rental yield will be lower. Vice versa, rents in a regional or outer suburb might be lower but compared to your purchase price, it can have a higher yield. A garage or car space, few stairs (exemptions would be made for a great view), and laundry capabilities within the unit can also affect the rate you are looking at. Ask your property investment advisor or property manager for recommendations and request for comparable sales. If you are an active investor, inspect a few rental properties as well to have an understanding on how your property is faring.

Interior Upkeep and Maintenance

When you are living in the property, you might be inclined to adjust a few things. You might find that the third bedroom can better serve as a dining room or you don’t need build in robes in all the rooms and so on. If it is going to be a home for a long period of time, go ahead. But if you are looking at the short to medium term, then it’s best to stick to neutral tones for the walls and fixtures and keep the kitchen and bathroom in good condition. You’ll also want it to be easily maintainable with sturdy window and floor coverings and good storage (tenants love storage space). If you have a yard/exterior space, don’t be overly ambitious with it. You might like to plant a maple tree in the middle of the garden but your potential tenants might mind the messy leaves in autumn. Opt for something that’s easy to care for. A property that’s most suitable for rental is attractive and well-conceived, but sensible, not fancy. Spending too much money on luxuries such as marble benchtops or high-end appliances may not be a wise investment too. That is what we call over-capitalising. Be wise by carefully monitoring the amount you spend on renovations.

In keeping your property in the best condition, you’ll want to make sure you deal with repairs early and efficiently. Needless to say, it’s best to keep take care of your property and if there is a water leakage, make sure to fix it as soon as possible. A water leakage can be disastrous if you let it slip between the walls and floor. Once you have a tenant and the property manager is reporting a critical fix to you, best to do it in a timely manner. Putting off repairs can not only harm your relationship with tenants but also end up costing more in the long run when you get around to them. You may want to have routine maintenance scheduled at regular intervals, such as annual checks of gutters and drains, signs of damp or mold, heaters or air conditioners inspected, etc. When you are ready to release some equity on the property, you will be happy you kept the property in good condition all along.

Tax Depreciation

It’s important as an owner occupier who wants to turn their current property into an investment property one day to keep all documentation related to any renovations or improvements they have made. Organising paperwork might not be everyone’s favorite past time but it is crucial when you make that transition to an investor. One of the reasons for this is to take advantage of the Australian Taxation Office’s (ATO) property tax depreciation. Properties and their fixtures depreciate in value over time, regardless of any actions on the part of the investor, and the ATO allows property owners to claim this depreciation as a tax deduction. Many Australian property investors are missing out on this benefit, which can translate into savings in the thousands of dollars, and improved household cash flows.

Keeping all of these factors in mind will help you make a wise and beneficial home investment that will be well worth the initial cost and effort.

Buying a home shouldn’t be a stressful process and it definitely shouldn’t be something that you will regret later on. A property is a high value transaction so you don’t want to be making silly mistakes. Although we cannot say that this article (Part One and Part Two) are the complete guide to buying a home, it can be a starting point. A home will not be just a home because at some point in time, you may want to turn it into an investment and rent it out. This asset will then provide ongoing passive income for your future and maybe one day, you will pass it on to your children. And if that happens, wouldn’t it be better to buy an investment grade property that would grow in value and provides good rental returns? If you are unsure of what to do, always seek independent and professional help.

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