10 July 2020 Investing in property? Answer these 10 questions first

Choosing an investment property can be daunting, particularly if you’re a first-timer. But there is a way to set yourself up for success. Approach the task methodically by answering these 10 questions in sequence – you’ll finish with a better understanding of your own needs and the options available to you.

1. What’s my budget? This isn’t simply the highest sale price you’re willing to pay: you also need to consider the fees and taxes that are added post-sale. ‘Your acquisition costs will generally be 5 to 6% of the value of the property,’ explains Ben Kingsley, managing director of Empower Wealth and a board member of the Property Investors Council of Australia (PICA). ‘That includes things like stamp duty.’ Exact rates vary from state to state, so do your homework.

2. How am I going to finance the property? Have a firm idea of where the money will come from – e.g. savings, equity in another property, a loan or a combination – before you begin your search, in case you need to hand over cash at short notice. A mortgage, for example, should be approved in advance.

3. How much can I afford to pay on an ongoing basis? The costs associated with investment property don’t end when the sale has been finalised. ‘You need to consider all costs associated with owning a property, like loan repayments, rates, strata, management fees, land tax, repairs and maintenance,’ says Chris Perry, DHA’s Director of Sales and Portfolio Operations. ‘Also remember that with a non-DHA property, there may be periods when you aren’t receiving any rent.’

4. What type of property do I want to buy? Houses and apartments both have pros and cons. For example, houses (particularly those with gardens) often require more maintenance than apartments. Apartments, on the other hand, are often subject to strata rules.

5. Where should I buy? Don’t confine your search to your local area, Perry advises. ‘Different locations offer different opportunity and risk profiles,’ he says. ‘Also, remember that different markets will be at different points in the cycle.’ Kingsley adds: ‘I like to buy in areas where location accounts for 80% of the capital-growth story. I’m talking about areas that have high owner-occupier appeal.’

6. Why am I interested in that location? Perry says prospective property investors often fall into the trap of buying property in areas they are emotionally connected to or have simply heard good things about. ‘You need to critically assess whether it really makes sense and make sure that you have researched the area thoroughly,’ he cautions.

7. What am I hoping to achieve from the investment? ‘Some investors are looking for a good income stream while others are hoping for long-term capital growth,’ says Perry. ‘You need to understand what your ultimate goals are, then look for properties that will help you achieve those goals.’

8. Are my expectations reasonable? Investing in property can be a great way to build wealth for the future or derive a reliable income stream. But you have to set your expectations at a reasonable level and ensure they are based on research, not just hopes and dreams. ‘If you think you’re going to get rich and retire early on one investment, then you’re likely to be disappointed,’ says Perry.

9. What are the risks? ‘You need to understand the risks to be able to minimise them,’ says Perry. Risks fall into two main categories: finance-related (e.g. interest rates go up, the market changes, you lose your job) and tenant-related (e.g. you can’t secure a tenant, your tenant damages the property).

10. How can I mitigate the risks? Perry advises investors to make financial calculations based on a range of situations, including worst-case scenarios. Kingsley suggests insurance is crucial: ‘Income protection, life insurance and TPD [temporary and permanent disability] insurance policies should be factored into your cash flow analysis when you’re looking to invest,’ he says.