How to take the first steps to become a property investor
Buying an investment property can sound like a solid idea in theory. But for the first-timer, it can also shape up as a confusing, sometimes overwhelming process.
Get the early foundations wrong, and it can really curtail your future profits, or even lead to a loss down the track. So where do you start?
Tip one: the first step isn’t related to either the investment or even the property itself, says Michael Beresford, director of investment services at property investment firm OpenCorp.
“That’s a common mistake that people make,” says Beresford. “A lot of them have that wonderful motivation to get started and begin that journey, but typically what that means is an emotional or an impulsive purchase on a weekend at an auction without having done the due diligence around their own situation.”
He recommends first getting an understanding why investment is important to you. Work out what you want your property portfolio to achieve, and then add the hard numbers around that.
“You want to make sure the properties you buy as investment shouldn’t be properties you would like to live in – they’re purely vehicles to be able to get you the financial outcome that you want,” says Beresford. “So really being clear on what the end looks like and what good looks like in terms of how much you want is the key first step and then shortly thereafter, understanding what’s actually possible from a borrowing perspective.”
Finding a mortgage broker with experience in helping investors is crucial. Ask for referrals, do some online research or read industry publications. “Then basically interview them to find out what their client base looks like, what are the kind of loans they set up and then how they would recommend setting up an investment structure,” says Beresford.
If the first broker you go to gives you a knockback, don’t be prepared to take that as gospel, says Beresford.
Ian Hosking Richards, the CEO of Rocket Property Group, says many first-time investors may have concerns, such as interest rates rising or a future tenant trashing the place. But those are usually minor issues for experienced investors who know how to mitigate the risks, he says.
“The worst case scenario rarely eventuates. If you do nothing you will probably work for a dog for 40-plus years and end up with little, so I think that Australians should be driven more by the fear of ending up without enough money, rather than the fear of making a mistake.”
Richards says a decent mortgage broker will be able to tell you of the steps needed to qualify for a loan. From there, you can work out your own timeframe.
“I would always recommend a pre-qualification rather than a pre-approval, as this does not result in a credit enquiry on your file, and allows the broker a degree of flexibility, so when a suitable security property is found, the right lender can be found,” he says.
So, do you need to earn big bucks to become a property investor?
Not at all, says Beresford. “Some of the most successful investors that we’ve dealt with have just been really diligent and stayed focused on what they want to achieve. They don’t listen to the outside influences; they don’t get put off by, you know, Donald Trump getting elected or whatever APRA might be doing.”
However he says that finding properties that are low cost to hold, preferably taking no more than $50 out of your pocket each week, is key. As is focusing on future capital growth rather than tax benefits, and leaving your emotions at the door.
“If you buy a property that you’re emotional about, chances are you overspend on it. Chances are that the rental yield and the tax benefits won’t be as good as what they could be and unfortunately the novice investor ends up having to cover that shortfall out of their pocket,” he says.