Advice for Investors
There are many considerations for people looking to invest in property, either Commercial or Residential. Many of these considerations relate to your personal circumstances – but there are still a few general things to consider which can help you ensure that your investment is sound.
Do your own research
There are a number of pertinent questions to ask a selling agent which we will get to, but it’s also important that you undertake your own independent research. Thankfully we live in the information age and it’s quite easy for anyone to get hold of valuable information to assist in their investment decisions.
It goes without saying that one of the most important decisions around investment is price. The price that you are willing to pay for the property and subsequently the return and yield you can expect from it. Property valuation and appraisal has a lot of different facets to it, but on a very basic level it comes down to the market – what is someone willing to pay for this property. With that in mind, the most important thing to look at is what other properties of a similar type and similar location have recently sold for. This should give you a reasonable indication of what the property should be worth at the moment. This should help you ascertain what you are willing to pay for it in within the frame of your own circumstances.
For a small price, you can order a property report from RP Data (www.myrp.com.au) – this is available to anyone and everyone and provides you with invaluable information to assist with your investment decision including suburb data, sales data on similar properties and sales history of the property in question.
What type of investor are you?
There are two types of investors – Active and Passive – and working out which one of these you are is tantamount to making a wise investment decision.
Passive investors, by and large, are looking to purchase a property, place a tenant in it, have it professionally managed and forget about it. If this is the type of investor you wish to be, then you need to give consideration to the following:
- Does the property I am looking at require improvement to attain the return I am seeking?
- Have I calculated the cost of professional management into my sums?
- Is the type of property I am looking to purchase high in demand for tenants/lessees? Is this likely to change based on factors outside of my control?
If you want to be a passive investor, which many investors do, then you need to have a good understanding of what the realisable return is on the property in it’s current state. Many properties can have their return improved by making improvements or upgrades, but this is a far more complicated arena to be playing in and will very quickly become anything other than passive. It’s also crucial to look at using a professional property manager if you want to remain a passive investor. Self managing may seem easy on the surface, but there are many ways you can come unstuck – most of which will have a negative effect on your return and/or your time commitments. It’s not expensive to employ a Property Manager (Commercially or Residentially) and the savings to your time and sanity are well worth the investment.
The last thing that a passive investor wants is a vacancy. A vacancy not only means that there is a period of time that you aren’t receiving income from the property (which you are likely to be relying on to cover the property costs), but it also means that you may end up being forced into accepting a lower return which will in turn devalue your investment. Vacancies can be inevitable of course – you can do absolutely everything right and still end up with one. But it’s very important to get a good understanding of the demand for your type of property at the moment and also an understanding of how external macro factors could alter that demand significantly. The best way to do this is to do your own independent research, and find a reputable professional to bounce your ideas off (something we are always happy to do of course!).
The situation is quite different for an active investor. An active investor is one looking to have a real and ongoing impact on their return. This is primarily done by investigating and implementing capital improvements/changes which are likely to improve the return of the property. This can be a very sound strategy when done right, but it can also be disastrous when done wrong. The key is to make sure that your sums are very accurate and that you have contingencies in place for when things go wrong. As is quite often the case, the greater the risk, the greater the reward.
Understand your finances and your limitations
The key to any investment is the numbers. What will the investment return? Will it appreciate in value? What is it going to cost me to invest? What is it going to cost me to hold the investment.
The big difference between property investment and most other types of investment is it isn’t very liquid. That simply means that a property isn’t necessarily easy to dispose of if you need to in a hurry (well, not as easy as a share portfolio for instance). So when you are making your decision to invest in property, you need to be in it for the long haul. Subsequently, understanding the real cost of property ownership is very very important.
If you are a first time investor, seek the help of a professional. Speak to your accountant, speak to your finance broker and speak to a professional property manager. Make sure that you account for and are aware of every potential cost for your investment – once you’ve done this, you’ll be able to see immediately if the numbers stack up. Most importantly, it reduces the chances of nasty surprises down the track (which most investors have unfortunately experienced at one time or another).
The best advice we can give you, is ask questions and seek help. The more information you gather, the wiser your investment decisions will be.
Here are a couple of articles which should give you some additional tips and tricks: