Starting Out in Property Investing

You don’t know what you don’t know.

This phrase has been the ruin of many investors. In the share market, if you’re not up to date with company announcements and news, your portfolio may take a hit from time to time. This might not worry you, as you might be a value investor in it for the long haul.

Yet even value investors need to how to properly analyse stocks. What makes a company great or stand out from the rest? Will earnings continue growing into the future?

These are the kinds of questions value investors need to know. If they don’t, they might as well be punting on stocks.

As always with high-risk punting, there’s a potential for high rewards but you should always know what you’re getting into before it’s too late to get out.

It could be said that a lack of knowledge has been the root of almost every failed property investor. They might have bought in the wrong location or the wrong property. Sometimes, it could be a combination of both.

With stakes much higher in property, it’s likely that not knowing could cause you financial strife for years to come. Sure, you can always sell out, but getting into property is an expensive venture in and of itself.

Outlays like stamp duty, borrowing costs and the requisite deposit add up to tens of thousands of dollars.

That’s why you need to do your homework. You, of course, won’t, and can’t, know everything about property. But, starting with the basics could save you thousands in the future.

Just a little bit of pain now — like research and knowledge accumulation — could improve your later outcome immensely.

Not knowing what makes a good location. Not knowing what type of property to buy. These are some of the biggest mistakes property investors make. And with hundreds of thousands of dollars, sometimes millions, at stake, you would think they’d do some research at least.

It can be daunting at first. It’s not like we get taught how to properly invest and create wealth at school. Instead, we were taught more practical things, like how to play the recorder or how to memorise definitions from a book…sigh.

So where could you start looking? Books and reputable websites are good initial starting points. Once you’ve moved on from there, you might want to start looking at groups or associations of likeminded people.

Let’s first cover the basics before you head out on your long mission of knowledge accumulation.

Need to know

You hear it all the time: location, location, location. Finding the right location when it comes to property investing is key.

But what is considered a good location?

Somewhere close to employment, usually in and around the CBD, and close to other amenities, are a good starting point. There is a simple reason why most people would rather live in smaller spaces in the city than a huge piece of land out in the sticks. The lifestyle offered by location is what’s important.

It’s just like when a luxury car salesman is trying to move cars off the showroom floor. He’s not selling the cars…or what they’re capable of doing. There are a million other cars that are cheaper and can perform the same function.

So, instead, the luxury car salesmen will sell you on the lifestyle of owning a luxury car. Think of the status, success and admiration you could have just by making this one purchase.

The same parallel could be drawn to real estate agents. They will spend little time talking about the specifics of a property. They might mention the number of bedrooms, or the square footage.

However, they will belabour the idea of having your friends over for a barbecue in the spacious backyard. Or they’ll mention the close proximity to the train station or city, highlighting the convenience of the location.

The next point to consider is the type of property you are intending to purchase. Is it going to be an apartment, flat, townhouse or house? It’s important that you’re able to justify why you bought a particular property type.

For example, if you’re looking to buy a one-bedroom apartment, it’s probably best to buy one that’s very close to the city. Why close to the city? Usually, people looking for a one-bedroom apartment are young singles or couples who work in the city.

You would not expect a family of four to buy a one-bedroom apartment. They have no need for one bedroom. They probably need at least three.

The same kind of thought process should be used for location, too. If you are looking to rent out an investment property to families, you’d probably want to buy near schools, major shopping centres and local sporting clubs.

Location and type of property are pretty common sense factors when investing in property. But taxation laws and accounting matters relating to property might be completely unknown to first-time property investors.

Drilling down

Property investing should be thought about in similar terms to a business. You are the owner, and the tenants are your customers. You can also have employees ranging from property managers to accountants and solicitors.

Let’s say your property runs at a loss, which means the rental income you receive is not enough to cover expenses of holding the property. This is also known as negative gearing.

Of course you don’t want to lose money. But if you have to run your property at a loss, that’s just the way it’s going to be until mortgage repayments come down. If you are going to incur a loss, why not take advantage of various options available to you.

Just like a business claims losses to lower their tax, you could do the same with your negatively geared property.

You should, of course, speak to your accountant first about how to maximise the benefits that are available to you.

Businesses will also claim depreciation benefits on their equipment and/or facilities. And guess what? You could do the same with your investment property.

Depreciation is a reduction in value of an asset over time. In our case, it’s the building, or any renovations to the property, which is depreciating. For incurring this loss, you’re able to create a depreciation schedule which could help you save on tax.

Again, you should always speak to your accountant to understand the best course of action for your situation.

Knowing about negative gearing and depreciation benefits is not why you should invest in property. But they can help you hold onto your investment for longer because they mitigate any losses that may be incurred. And these are only two of many more options that are available to you.

Before you even buy, do some research, find out what to buy and where, then maximise your returns. Simply ‘not knowing’ could cost you thousands…and a whole heck of time.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research and take control of your financial future.

But where do you start?

If you’re interested in investing in property, check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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