How to buy an investment property

Published 15 November 2012 04:49, Updated 15 November 2012 05:17

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To be a successful investor, you may need to think outside the box to get started. The first property I bought was a run-down inner city terrace for $96,000. I cleaned it up and rented it for $100 a week. Even though it wasn’t a palace, it was a lot nicer than the $40 a week studio I was living in. But I chose to stay in the studio for another two years to maximise my cash flow so I could get a foothold in the market.

Looking back, I’m glad I made that sacrifice. A few years later I sold the terrace for $260,000. The lesson here is that most markets are growing faster than you’ll ever be able to save. So the question is not “Should I get in?” but “How can I get in?”

Most Australians make more money from their property investments each year than they do from their full-time careers. With many areas in this country boasting median prices of more than $500,000 and an average capital growth of 7 per cent over the life of a property, that spells a $35,000 annual capital gain which, if it’s your own home, will be tax exempt.

Therefore, if you get into a position to buy your home and then an investment property or two, it can be a life-changer if you do it right. I’m fairly conservative and a risk-averse investor and I don’t think you need to be a huge risk-taker or to borrow beyond your means to create a profitable portfolio. So here are a few tips on how to maximise your property investment and ensure you do it safely and with minimum stress.

Research. It’s worth knowing your stuff when it comes to real estate. A great buy in the right growth precinct can make you a considerable profit over a decade. Be prepared to put in the effort and research both areas and property values. Almost all the information you need is available via the internet, so there’s no excuse for not being prepared.

Finance. Before you start looking, meet a broker and get yourself financially pre-qualified with the best rate possible. Not only will this save you money but it also allows you to move quickly when you identify that great buy in the market, rather than having to wait to get finance approved. Real estate agents will also work with you more effectively if they know you are ready to go when the right home comes along.

Buy for growth. Some people get excited when one investment yields a 5 per cent return instead of others that offer a 4 per cent yield. In my experience, it’s super capital growth that makes you rich in real estate and that is rarely the same properties that offer the highest yields. While the rental return is relevant in so far as it has to repay your loan, your real pay day will come when you find a property that rises in value at 9 per cent a year rather than 7 per cent a year. Over 10 years, that can give you a huge windfall.

Buy property you can drive past, ideally in a major city. Avoid buying an investment property in an area you don’t know. Buying units off-plan in unfamiliar areas from sexy marketing brochures is a recipe for potential disaster. If you live in a major city, you don’t have to look elsewhere. If you live in a regional area, you may want to consider buying into the nearest major city. The capital growth will be mainly in the bigger cities and especially if you can combine it with a location nearer to the waterways.

Get close to the CBD and the water. Buy within 10 kilometres of a major CBD and, if possible, near beaches or waterways. Enough said. This will yield you the strongest growth.

Use both your head and your heart. I disagree with so many experts who say “Don’t be emotional when buying an investment property”. I say, get emotional and buy a property that excites you. Remembering that your greatest return and capital growth will come when you sell it for a huge premium, find properties that will give you not only a decent rental return but will also excite future home buyers.

Pay above median price (trust me). Be prepared to buy up. By definition, the average price represents the average house. If you want to buy a superior home in an area, you’ll be required to pay above median. It’s important to remember that if it’s in a high-demand area, the better the property, the better capital growth you’ll get. Prime locations are always prime. Try to buy something that’s better than the average in location, land size, aspect and design.

And finally, things I’d try to avoid.

Main roads offer value for money but rarely have the same growth as quieter locations. Stick with the quieter streets.

Serviced apartments usually can only ever be sold to another investor. So you cut out 60 per cent of your market when owner-occupiers can’t buy your investment. Often these provide good yields but lousy growth historically.

Commercial buildings refurbished to residential almost never work. Buy purpose-built residential buildings and avoid office buildings that have been recycled to residential.

John McGrath is the chief executive and founder of McGrath Estate Agents.