With the help of Adrian Stroh, Independent Inner North and City, and Grace Hooper (General Manager of Property Management at Independent), we have compiled our top tips for buying your first rental property. Grace is the undisputed expert in helping you make the most of your rental property. Adrian has been selling Canberra property for 8+ years.
1. Calculate the cash flow
Cash flow simply refers to the money that flows into and out of the property. Rent payments are one way that cash flows in. Cash flows in the form of rental payments to cover running costs such as mortgage payments, rates and utility bills.
It’s not uncommon to lose a little money in the initial years of investing in property. This is because rent does not cover all the mortgage payments plus any additional costs. You will eventually break even, then turn a profit as your rent increases and your mortgage payments decrease. This can take some time. It is important to know your cash flow. You should be sure that there is no $100 gap between your rental income and your running costs before you commit to anything.
Adrian advises that it is always a good idea for you to speak to a broker before doing the sums. We will connect buyers with a mortgage broker to help them calculate their cash flow. We have all the information buyers need about rates, strata fees, and land tax so they can know exactly what they will be paying.
2. Understand depreciation
You can subtract the difference from your total taxable income if your investment property is more expensive to operate than it generates in income. This is called ‘negative gearing.
Depreciation is a way to maximize your deductions. Every structural element, fixture, and equipment within your investment property will eventually need to be replaced. You can deduct wear and tear from your annual deduction through depreciation.
The complex area of depreciation has predetermined rules that are set out by Australia Taxation Office. There are also many methods for claiming losses. Investors can no longer claim depreciation for second-hand equipment and plant, but can do so for new items. This can make an off-plan purchase more tax-friendly that an existing property.
Adrian suggests that it’s a good idea to consult a BMT depreciation specialist when doing your calculations. There are many things you can claim, especially if you buy off-plan. A depreciation schedule is necessary to maximize your claim. Talk to someone as soon as possible to get a depreciation schedule. It can make a big difference in your bottom line. We will gladly refer you.”
3. Find the right property for you
Prior to purchasing an investment property, be clear about your goals. Certain types of realty are more favorable for positive cash flow. This is ideal if your goal is to increase your income. While they might be more expensive to maintain, these properties will have a higher value and also provide a greater return on your investment. This might be the best place to focus if you plan on selling it later for a profit.
No matter what strategy you choose, certain properties are better investments than others. To ensure you choose a property that attracts reliable tenants, consider factors such as rental demand, ongoing maintenance, property value over time, and location.
Grace states that Canberra is a great place to invest regardless of where you’re located. Grace says that as long as you are close to amenities and local shops, it doesn’t necessarily need to be the main town centre. It all depends on your goals. It all depends on your goals. Are you looking to make a cash-positive investment or offset your taxes with a negative gearing? The Canberra market offers some of the most desirable apartments that offer positive cash flow and great rental returns right from the start.
4. Get in touch with a property manager as soon as possible
A property manager can help you find, vet, and place tenants in your investment property. Did you know they are available even before you buy a property? They are experts in the area and can tell you which types of tenants are searching for properties, the best locations, and what rental demand is.
Grace says, “We are always happy to give advice.” Grace says, “We can tell where there is the greatest demand and we can pass on what tenants have to say about their needs.” While we cannot give financial advice, we can tell what you can expect to pay for various properties.
5. Focus on location
Location is the key to attracting tenants.
It all depends on what property you are looking for and who the tenant is. For young professionals, a stylish, new apartment with an off-plan layout will be more appealing if it is close to good restaurants and entertainment. You can attract families to your suburbs house by finding a place close to parks, schools, and public transport.
Grace explains. Grace explains that Canberra’s tenant population is diverse enough that any property can appeal to everyone. It’s important to consider the potential uses of the property if you are looking to purchase. Are you able to attract families if you are located in certain school zones? Is it possible to commute to the CBD from a one-bedroom apartment that appeals to young professionals?
6. Place yourself in the shoes of tenants
Once you have the location, start thinking about the potential property.
Ask yourself what you would want as a tenant before you purchase. Tenants don’t intend to stay somewhere for ever and they don’t feel the same attachment as owners.
Grace says that there are certain things tenants should look for when choosing a property. A nice kitchen and bathroom is a big plus. It doesn’t matter if it’s not too modern or looks good. Good heating and air conditioning are almost mandatory nowadays. No one wants to be cold in Canberra’s winters!
Complexes that have a swimming pool and a gym are in high demand because they offer tenants additional amenities without the need to maintain them. Grace says that parking is becoming a more important concern. Many people rent out their apartments as a couple, and they may have two cars. However, the apartment may only have one or no parking. This is something to be aware of.
7. You should look for something that is low-maintenance
Your tenant won’t like you spending weekends at their investment property making repairs. Property that is in dire need of constant maintenance can be a drain on your finances, your time, and your peace-of-mind.
Adrian says that a brand new property is ideal to invest in. It’s ready for you to move in, and all the contents will be covered under warranty for the first year.
There are ways to make your property more maintenance-friendly.
Grace says, “When we deal in properties that require more maintenance, we often negotiate for tenants to meet their needs.” Grace cites the example of a large backyard or pool. These are technically the tenants’ responsibility. However, if they don’t want to deal with the hassle of hiring a cleaner or gardener, we can negotiate an increase in rent. This ensures that the property is maintained in a good condition, and the tenant has access to the additional amenities without any hassle.
8. Do not jump in feet first
Every time you make an offer, do your research. No matter how much you love a property or if you have made a commitment to yourself to purchase it before the end the financial year, this is important. You will always reap the rewards of taking extra care and time.
Before you sign on the dotted lines, here are some things to do:
Get a building inspection. This will give you an overview of the property’s condition, and let you know if there are any issues. For a thorough overview, combine it with a pest inspection.
Searching for developments in the area. This beautiful view could be threatened by a new shopping center, or infrastructure plans that could really increase your property’s value.
Get to know your neighbors. Grace states that while the property may be beautiful, a neighbor with a junkyard next to it could put off potential tenants. Also, ensure there aren’t ongoing disputes. The seller might not be required to disclose bad neighbor situations unless the matter has been resolved by the courts. However, it is worth speaking with your local real estate agent and using their friendly search engine to find out what they know.
Adrian says, “We have a broad view about what’s out there as well as what’s up.” We’ll be the first to know if there are plans to build a shopping centre or if the eyesore next door is going to be demolished and rebuilt.
9. Negotiate with confidence
Adrian states that investors are often up against homeowners who live in tight markets. People who are looking to buy a property to live in are more willing to pay more. They are drawn to the property by their emotional attachment. They feel that the property is worth a lot of money, so they offer a better deal. Investors want to make a profit and are looking for a great deal.
What does this mean for you? It is possible to always be prepared for higher prices. Adrian advises that you look for properties without the emotional investment. He says that investors always gravitate to properties that are not in the traditional plan. They don’t have the same quirks as rare properties, so you have a lot of options.
10. Pre-approval for a loan
Pre-approval for a loan puts you in a much stronger position. You need to ensure that you are not promising money that you cannot pay, especially if you are buying at auction. You can feel confident that you have all the paperwork in order.
Visit our buying off-plan page to see a list off-plan developments that might be a good investment.
We’ll soon be in touch with you if you need any investment advice or a property manager to manage your new investment.