Buying an investment property can be a great way to build long-term wealth, but it also involves asking the right questions to avoid costly mistakes. In this article, we will explore some of the key questions and answers that potential property investors need to know before taking the plunge.
What rental yield can I expect from an investment property?
The rental yield indicates how much rental income you can generate as a percentage of the property’s value. A good rule of thumb is to target a gross rental yield of at least 5-7%. This means if you buy a $500,000 property and rent it for $25,000 per year, your rental yield is 5%. Always research rental yields in the suburb you plan to buy in to set realistic expectations.
Should I buy an investment property in cash or with a mortgage?
Using a mortgage to purchase an investment property can allow you to buy a more expensive property and increase your potential rental income and capital growth. However, it also comes with interest costs and risks if property values fall. Buying in cash reduces risks and interest costs but limits your buying power. There are pros and cons to both options.
What expenses do I need to factor into my investment property calculations?
Aside from the purchase price, factor in costs like: mortgage interest, property management fees (6-10% of rental income), council rates, property taxes, regular and one-off maintenance, property insurance, etc. These can add up to thousands per year and impact your net rental return, so include them in any property analysis.
Should I use a property manager or self-manage my investment?
A property manager takes care of tenant sourcing, rent collection, maintenance issues etc for 6-10% of the rental income. Self managing saves costs but is more hands-on. For first timers with busy lifestyles, a property manager could be the better option. Some investors start off using a property manager to learn the ropes before self managing.
What location features should I look for in an investment property?
Location sets the foundations for growth in rental yields and property value. Look for properties in areas with solid demand from tenants, proximity to local amenities, good schools and transport, appealing lifestyle features and infrastructure supporting capital growth. Population growth and economic activity are also good indicators for property investment locations.
Asking the right investment property questions is vital preparation before purchasing to maximize returns and avoid costly mistakes. Factoring in all the costs accurately, setting realistic expectations on yields and weighing up location features critically are all key to property investment success.