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Ask yourself these questions before you start looking

Sometimes investors can get ahead of themselves when thinking about property.

It’s important to consider the fundamentals and determine if property is right for your situation.

Even experienced investors need to ask themselves some tough questions before they add to their portfolio.

Author: Dale Alcock, Managing Director, ABN Group.

  • When I talk with people about investing in property, the major concerns I hear are often along the following lines:

    These are the sorts of juicy issues we all like to mull over. They’re important considerations in their own way, yet for first time investors weighing up the merits of a property investment, there are some more important things to think about.

    I’m going to propose some different questions. These are the questions I believe everyone should be asking themselves before they even think about such things as suburbs or property types. Boring they may be, but thoroughly answering these questions will help you make objective decisions about your first property investment:

    Am I financially prepared to have a shortfall on my investment loan – and meet this shortfall every month for the term of the investment? How much of a deficit you can manage – if any at all – will go a long way to determining what type of property you invest in. A high yielding apartment, or a low yielding property aimed at maximising capital growth?

    Am I prepared for the property to go down in value at some point during the term of my investment? Bearing the potential for value to occasionally go down is what long term investing is all about.

    Am I prepared to pay for out of pocket expenses? These will include property management, council and water rates, maintenance for things such as reticulation and hot water systems, replacement of carpets and blinds and so on. Investors can get caught out with these types of expenses but they are a genuine cost of property investment and in the long run they should be dwarfed by any capital growth.

    Am I prepared to have a potentially significant amount of cash (and a large debt to the bank) riding on the performance of one asset? This is something many people overlook. Take into account the balance of all of your investments – including your super – when making this decision.

    Even experienced investors need to ask the tough questions before contemplating adding to their portfolio. If you already have an investment property, here are some more questions to consider:

    How should I construct my finance to take maximum advantage? What type of finance, what level of gearing, and what impact will this have on your overall financial situation.

    Am I leaving myself enough of a buffer? In other words, will the investment take you beyond your preferred level of risk tolerance? Figuring out what level of risk you are prepared to take will make future investment decisions easier.

    What type of second property should I purchase to effectively diversify my portfolio? Think about your overall portfolio and the importance of diversification amongst properties – not just the merits of each new property on its own.

    Should I think about different ownership structures? Ownership structure can impact flexibility and profitability. In certain circumstances there may be benefits to owning property through your self managed super fund, under company names, trusts or in your partner’s name.

    If you want to make good decisions, then treat property investment like a business decision. It’s not as exciting as going straight to the for-sale ads, but it will pay long-term rewards. 

    • Market timing: e.g. is now the right time to buy?
    • Where to buy: e.g. I want to buy in this suburb because I know it / like it / grew up here.
    • What to buy: e.g. I want an old house so maybe one day I can knock it down and subdivide.

 

DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.