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17 Jun 2020

What to consider when building your property portfolio

By Damon Frith Controlling your wealth through bricks and mortar.

Current market conditions are ambiguous, and it is uncertain how the property market will perform over the next 12 months as we continue to face the effects of the pandemic - much may depend on our efforts to tackle re-employment.

So far the market has shown resilience, with only modest declines, and in some pockets increases. No matter the trend over the next 12 to 24 months, property is a long term investment, so you have time to consider your options and carefully plan your entry into the market.

While watching auction clearance rates and sale prices in suburbs you are interested in, there are always some basics to also consider when thinking about taking on an investment property. These are our top three tips.

Understand the costs associated with buying.

How much can you afford to spend on your investment property? As well as the purchase price, there's the cost of maintenance, property management fees, strata levies and landlord insurance. You may also have to renovate to attract a tenant.

Before you buy, make sure you're comfortable with your current debt levels, and have a buffer to allow for any periods where your property may be untenanted. Unexpected costs can also arise, such as a sinking fund plan for a strata building.

If you already have a mortgage on your own home, you can use your equity to fund the deposit for your investment property – typically up to 80 per cent of your home valuation minus your debt.

Negative gearing comes with a cost

Property can be a good long-term investment option as part of building your retirement nest egg – and it also comes with an attractive tax advantage if your rent doesn't cover all the costs of your investment (including your interest repayments). This is called negative gearing.

However, negative gearing basically means your investment is impacting your cash flow every month – and this could lead to financial stress if you don't have a comfortable buffer.

Finding opportunities for growth

You're not buying somewhere to live, you're buying an investment – so take any emotion out of the decision. First, work out the expected returns – income plus capital gain – as this must exceed your borrowing costs over the long term.

Then look for the features that will appeal to renters, such as close proximity to transport, schools and shops. Areas with universities or hospitals will always have strong demand. Find out what other developments are in the pipeline, as they could impact future demand and amenities – and if you're not familiar with the area, it's worth getting advice from a buyer's agent.

Finally, make sure you ask your bank to pre-approve your investment loan before you start hunting.

 

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