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Financial independence is something we all dream about, especially in today’s often challenging and uncertain
Financial independence is something we all dream about, especially in today’s often challenging and uncertain economic environment. We become financially independent when the income generated by our assets exceeds our day to day living expenses. Sadly many of us do not and will not have sufficient assets now and when we retire (for instance through our superannuation) and hence don’t or won’t have sufficient income to help provide for a decent standard of living. And so we have to go to work to earn enough money to pay our bills and hopefully have enough left over to be able to invest for our future. And until we do have sufficient income producing assets it means we are dependent on someone else, like our employer, for our financial wellbeing.
Thankfully there are strategies we can adopt that will help build these all important income earning assets and one of them is residential property investment. If done correctly property investment can provide both cash flow and capital gain thereby providing an ongoing income stream and a welcome cash lump sum when the property is eventually sold. However, if done incorrectly it can result in significant financial problems and in the worst case, financial ruin.
So to help you become a successful first time property investor, here are the my top ten tips to help you along the road to financial independence:
1. Set clear financial objectives
Never invest in something just because someone said it was a good thing to do. And investing in property is no different. Take a step back and make sure you have set yourself clear financial goals. For starters, you have to define what they are and then ask yourself “will investing in residential real estate help me achieve them?” You have to set tangible targets around things like return on investment, cash flow and timeframe. You also need to consider risk and liquidity factors.
2. Treat your property investment as a business
Owning an investment property is like owning a business and you’re the CEO. You have to make sure your business is structured correctly, is supported by the right leadership, resources and technical knowledge and experience, is financially viable, is meeting its financial targets, complies with government rules and regulations and is being well run and managed. If you don’t think you can deliver on these requirements yourself than you need to hire someone who can, or think twice before investing.
3. Seek help
Before taking on what will be a big financial and emotional commitment make sure you learn about and fully understand the business of property investing. Remember a little knowledge is a dangerous thing so don’t invest if you don’t know. And if you don’t know than get advice from sources like trusted family and friends (who may have prior investing experience) and independent advisors like accountants, property advisors and financial planners. You should also read widely and follow market trends in newspapers, specialist property publications and online.
4. Research the market
As part of your education process you must research the market and get as much property data as you can, especially in the areas you are thinking of investing in. Your aim is to ensure you’re buying the right property, in the right place, at the right time and at the right price. You should register and talk with local selling agents, go online and visit property websites which often provide valuable and free suburb and property information. You can also purchase cost-effective property and investment reports from Onthehouse which will help ensure you’re armed with up-to-date information on market trends and property valuations.
5. Be patient and invest sensibly
It goes without saying that buying the wrong property will deliver the wrong financial results so don’t rush. You have to balance two competing requirements – what you want and what your potential renter and (ultimately) buyer wants. So take your time and consider all options. In particular, put yourself in the shoes of a potential renter and ensure the property meets their specific needs – this includes charging affordable rent, before you buy.
6. Capital growth is key
It might be stating the obvious but you should aim to buy where there is potential for above inflation long-term capital growth – say a minimum of 2%-3% plus CPI. This is where research, education and wisdom comes to the fore.
A sensible approach for your first investment would be to look for locations where property values have shown solid and consistent growth over the long term – and this is where talking to local estate agents and purchasing suburb property reports is invaluable. Start your search with properties within 20 - 30 kilometres from the city and major regional centres and properties with unique aspects like ocean or city views.
7. Property inspection is a must
The last thing you want to do is buy a lemon - something that has inherent, but perhaps not obvious defects. It’s important that you inspect a property thoroughly with an objective eye and it’s a good idea to bring family and friends along to get an unbiased perspective on what’s good and what’s not. And when you’re serious about a property, bring in the experts for a structural or pest report if you’re not sure or you want peace of mind. It’s better to pay a little more up front than a lot down the track.
8. Cash is king
It’s extremely important that you don’t overcommit financially and that you can afford to own, manage and maintain your investment property. This means you must prepare both a personal and property budget so you can quantify how much of your own money you’ll have to commit upfront as well as on an ongoing basis and what sort of cash flow the property will produce. You may need to get help from your accountant or financial planner to ensure your budgets are comprehensive and properly aligned and integrated.
9. Avoid rental guarantees
Rental guarantees are often associated with new property developments as a marketing ploy to entice you to buy. It sounds good in theory (that you’ll get a minimum rental return no matter what) but in reality they have dubious value. This is because the purchase price is often inflated to cover potential claims under the guarantee (meaning the buyer is effectively paying for it) and they’re only worth something if the guarantor is an organisation with financial substance. At the end of the day, if the rental guarantee is the deciding factor for choosing to invest, you’re probably better off finding another property that makes financial sense without the guarantee.
10. Don’t do it all yourself
As a first time investor it makes sense to get all the advice and help you can get. Sure, you can do it yourself but unless you have the right level of knowledge and experience you are more likely to make mistakes unless you have the support and guidance of a trusted and experienced advisor. Of course there may be additional costs involved but you should view this as a way of mitigating your risks and as an investment in your education.
In time and through experience you can take on more of the workload yourself if you wish, but initially and to help ensure a successful property investment you need the wisdom of experts in a variety of key fields including property research, letting, taxation, accounting and financial planning. This means you’ll probably need more than one person to help you.
Article by Peter Boehm
Peter Boehm is the Consulting Finance Editor with onthehouse.com.au