The first thing I ask a potential purchaser when discussing investment property is “why do you want to invest in property?” The overwhelming amount of time, the reason given is “to pay less tax”. While tax is an important factor when investing in property, it should only be a benefit of investing, not the reason. Knowing what makes a solid investment is paramount to selecting the right property.
There are three key areas to assess when selecting an investment, see below for a breakdown:
1. Capital Growth
Building Wealth. You should be assessing your purchase for its potential for high capital growth first and foremost. Does the property have a better chance of growing more than other properties in its price bracket? Assessing this can be tricky and should not be based on the opinion of the selling agent or your ‘guess’. Full due diligence on the area and how that property type fits the demographic in the suburb, should be undertaken.
Building Wealth is the main benefit of investing, the reasons vary for each individual for why they want to build wealth and that is the key to why you should be doing it. Do you want to secure your children’s future, build enough equity to buy your dream home or maybe be comfortable in retirement?
2. Cash Flow
Cash flow is a key component to any investment and should be calculated to ensure you are comfortable with the out of pocket expenses. Rental Return is the obvious factor that controls the income but the expense side of the equation is slightly trickier. Interest payable, agent’s management fees, loan fees, council rates and maintenance costs are easy to estimate, the trickier components are factors such as non-cash tax deductions (depreciation) and body corporate fees.
There is little value in a great rental yield if the body corporate is $6,000 per annum! Also, the non-cash tax deductions are impossible to ‘guess’, the use of a profession quantity surveyor is needed here. After gathering all the info and speaking to a professional to assess the findings will you be able to confidently ascertain the cash flow of the investment.
3. Minimizing Risk
Good capital growth and cash flow are great but only if the risks associated with them are reasonable. The fact is there is risk with every investment, the need to assess and protect the investment against that risk is the key to determining the overall value of an investment. You should always consider insuring the investment and the income it produces; speak to your financial planner for more information on the best ways to do this.
The reasons above are the key factors you should consider when selecting an investment property. Our next blog covers what facts and evidence should be attained to prove these key factors so keep an eye out for it over the coming week!
Bill Nikolouzakis – Director of Nyko Property.
Nyko Property is a Real Estate Agency that specializes in researching and qualifying new residential projects to investors across Melbourne. With a passion for Melbourne property, the projects they offer are only available through their exclusive partner relationships. To find out more about their due diligence process for selecting investment property contact Nyko Property on 1300 720 315. www.nykoproperty.com.au