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Buying an Investment Property

Creating Wealth through Investment in Real Estate

Jun 20, 2009 Pauline Mascarenhas

Establising a property portfolio helps to achieve wealth through capital growth and can also enhance cash flow by rental returns.

In Australia investing in real estate is used as a vehicle to creating wealth and enhancing cash flow. To maximise wealth creation by property investment requires certain factors to be researched.

When considering purchasing a property for investment purposes, the mind-set needs to be totally different to that when buying a home to live in.

There are some key factors to look into.

  1. Location: the suburb population, reputation and proximity to the city. Is it a suburb that families want to live in? Has it got a reputation as a 'safe' suburb? Is it sufficiently close to the city for people to be able to commute for work, education, entertainment, etc
  2. Transport: convenience in relation to catching trains and buses. Is the property located within easy reach of train stations and bus stations?
  3. Facilities: proximity to schools, shops, entertainment, etc. Has the suburb got a good reputation regarding its schools and shopping centres and has it got other entertainment facilities like theatre complexes, recreation centres, parks and play-grounds?
  4. Age of the property: should be reasonably new to avoid high maintenance costs. If the property is very old, then obviously there will be on-going maintenance costs to consider.

In addition, there are other areas to consider in relation to capital growth:

  • Growth potential of the area: what is the highest price of the properties in the area?
  • Land content of the property: it is an established fact that land appreciates and buildings depreciates. Therefore, it is essential to ascertain the value of the land content as a percentage of the purchase price to determine if it is a good investment. The higher the percentage the better.
  • Demand for rental properties in the area: the stronger the demand the better.

Investing in real estate can be made less complicated by following these simple rules:

  1. Getting financial and legal advice: There are many tax and legal ramifications. Therefore, it is prudent to consult an accountant or financial advisor.
  2. Using the equity in other properties: However, if this is the first purchase, then a cash deposit plus funds to meet fees and charges will be required.
  3. Borrowing the cost of the property and fees and charges: If equity in other properties are being used, then it may be possible to borrow the full cost of the purchase including the relevant fees and charges.
  4. Obtaining information regarding tax advantages from an accountant: This could mean the difference between the property being positively or negatively geared. (Positively geared - The income from the property is more than the costs of holding it. Negatively geared - the costs are more than the returns and therefore may be able to claim a tax deduction).
  5. Choosing the right lender and the correct loan product: There are many lenders and loan products in the market and the ones chosen should suit the investment strategy and future plans.
  6. Interest Rate and Interest Only Loan: It is prudent to choose a Fixed Interest Rate and, at least initially, an Interest Only Loan product should be considered to minimise outgoings. Again, this is an area of consultation with the tax accountant.
  7. Adopting the 'Buy and Hold' strategy: consider a long term approach to investing. It is an established historical fact that property values in Australia have doubled every 7-10 years.
  8. Making the Decision: An investment decision should be based on logic and not on emotion.

With careful planning and by obtaining the necessary professional advice, creating wealth through investment in real estate is within the reach of most people.

The copyright of the article Buying an Investment Property in Investment is owned by Pauline Mascarenhas. Permission to republish Buying an Investment Property in print or online must be granted by the author in writing.
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