Buying a rental property in Australia can be a lucrative income-generating opportunity. The temptations are irresistible! Despite the global coronavirus pandemic, the demand for rental property continues to grow over the last two weeks.
According to EY, tenants residing in upmarket locations can save a whopping $500,000 by renting than buying a homewhile they can save between $200,000 and $300,000 in cheaper regions.
Regardless of the “dead money” stigma attached to it, take it from industry experts that “With today’s property prices, you could be better off renting somewhere affordable and investing the cash you’ve saved,” says EY chief economist Jo Masters. Additionally, many Australians are still apprehensive about buying a new home amid the financial crunch currently prevalent due to COVID-19.
All these facts clearly indicate that buying a rental property is one of the best investment decisions you can make. The perks are numerous and you can only expect the value of your property to be growing in years to come. But at the same time, it is a significant investment, and therefore, your homework must be done right.
To ensure having higher returns and the best value for your rental property, there should be a definitive strategy in place. Discussed here is what your investment strategy should include.
1. Find a Good Location
Location. Location. Location. Because the last thing you would want is to invest in a poorly-located rental property that only renders declining value. A sought-after housing region, such as Melbourne and Sydney, or one where the population is growing or has excellent development plans under progress has good investment opportunities.
Thus, when finding the right location for your rental property, check for factors like a good school district, lower property taxes, easy access to public transportations, a fast-growing job market with more immigrants, a decent neighbourhood with fewer crime rates, and modern amenities.
These are primary factors in attracting a large pool of potential tenants.
2. Estimate the Cash Flow
Before investing, it is important to calculate the cash that is estimated to flow in and out from the rental property you wish to buy.
For this, you need to consider your potential rental payment and value it against your cash flow-out such as mortgage repayments, utility bills, corporate fees, taxes, etc.
Then determine whether or not it is worthwhile investing in the rental property.
In the initial years of owning a rental property, it is not surprising to make little loss because your rental payments will not meet your loan repayments and additional costs.
It is only when your mortgage decreases and rental income increases that you can break even and earn a profit.
It is always a smart decision to consult an investment broker before doing the calculations in order to get accurate numbers.
3. Use Leverage as Your Mortgage Strategy
Before buying a rental property, make sure you understand the mortgage market thoroughly. This is important because the right type of mortgage can help lower your costs while reducing uncertainties regarding your cash flow. Here you can use the tactic of “leverage” on your mortgage. This will help save some of your costs which you can save for future expenses or other investments.
However, experts suggest that it is your best bet to have a professional help you with financial planning.
4. Weigh Your Financing Options
This is a crucial aspect of strategy-building when planning to buy a rental property. If you have decided to finance your investment, then it is important to line up your options carefully.
Should you choose a mortgage with an adjustable rate or fixed rate? Do you want the tenure to be 15 years or 30 years? How will this affect your repayments and interest rates?
Understanding these elements is crucial to make an informed financing decision.
A better way is to check with an online marketplace where you submit your lending requirements and compare offers & rates quickly from multiple financiers.
5. Single-Family Rental Properties First
When you are buying your first rental property, consider keeping it simple and less complex by investing in single-family homes.
By investing in single-family homes, getting a mortgage will be easier because the amount you borrow is lower.
The maintenance is easier as compared to commercial or multi-tenant property. Additionally, the demand for single-tenant rental properties is high in Australia. So, it is a great way for new investors to get started.
6. Do Not Forget to Have a Landlord Insurance
Buying a rental property can be a significant investment for you. Make sure you protect it against unforeseen perils with landlord insurance.
It typically provides coverage for property damage due to natural disasters, fire, or flood; loss of rental income due to unanticipated reasons; and liability protection.
The above tips will help you make a more informed decision and have a better value for your investment by having a rental strategy from the start. This will allow you to be prepared when unfavourable scenarios occur.
