Published at: 2/3/2017 8:19:09 AM
Thinking about investing in a rental property but not sure how it all works? Check out our 10-step guide to understand what’s involved.
Before flicking through property listings, take a moment to consider the goals you hope to achieve by investing in property. Are you looking for extra income from regular rent payments? Or is capital growth your main aim?
It’s important to do some soul searching early on because it can help you pinpoint the suburbs and properties that let you achieve your goals. As a guide, inner city suburbs tend to deliver strong rates of capital growth while outer suburban or regional properties can dish up high rental yields (that’s the annual rent as a percentage of the property’s market value). Similarly, houses often enjoy higher rates of price appreciation than apartments, though apartments tend to command higher yields. It’s all about finding the property that is right for you.
Do the maths to be sure a rental property fits easily into your budget. You’ve probably planned for upfront purchase costs like stamp duty however you also need to allow for regular property-related expenses like council rates, insurance, repairs and maintenance. Your investment property will generate rent to help meet these costs though you can expect occasional vacancies. So allow for a few weeks of vacancy each year. This way you’ll get a better picture of your investment cash flow and its impact on your household budget.
Your borrowing limit plays a big role in the type of property you can afford to buy. ME’s Borrowing Power Calculator can provide an idea of how much you can afford to borrow. Better still, speak with an ME Mobile Bank Manager (call us on 13 15 63) to get an exact figure for your circumstances. This is also an ideal opportunity to discuss the investment loan best suited to your needs.
Okay, now’s the time to start inspecting properties for sale. Buying as an investor is quite different from choosing a home to live in. You don’t face restrictions like the need to be close to work or family. However, it does pay to look for properties with broad tenant appeal. In particular look for low maintenance properties with plenty of storage and off-street parking in locations with good transport links and nearby facilities like schools and shops.
When you’ve found a property that ticks all the boxes, ask for a copy of the contract of sale. Pass it on to your solicitor or conveyancer so it can be reviewed for any unusual clauses or conditions. Ask the listing agent about the rent the property can command, and have any estimates put in writing. Some (though not all) lenders will take rental income into account when determining your eligibility for a loan. If the property is for sale at auction ask the selling agent about the deposit you’ll need to provide if you’re the highest bidder.
An independent pest and building inspection will confirm whether the building is structurally sound and free from destructive creepy crawlies. A less-than-perfect report can be used as a bargaining chip in price negotiations – as long as you have the cash to fix up any issues. If you’re interested in an apartment or townhouse, consider a strata report, which will show if the body corporate is in good financial shape.
Depending on the health of the local property market, try knocking 10 percent off the purchase price. This leaves some wiggle room for further negotiations with the vendor (seller) though always be mindful of your borrowing limit especially if you’re bidding at auction.
Success – your offer is accepted! At this point you and the vendor will each sign a copy of the sale contract, which is then handed over (exchanged) to your respective solicitors/conveyancers. You’ll need to pay a deposit, usually 10 percent of the purchase price if the sale is by private treaty. Be sure to get in touch with your ME mobile lender to formally start the ball rolling with your investment loan.
It usually takes 6-8 weeks following exchange of contracts for your property purchase to be finalised (or ‘settled’). During this time your solicitor/conveyancer will work behind the scenes completing all the necessary paperwork to transfer the property into your name. ME will be hard at work too getting everything ready for your investment loan.
Use this time to consider whether you’d like to use a property manager to handle your rental or if you’d prefer to take a do-it-yourself approach. Shop around for insurance too so that your new rental property is fully covered by settlement day. Landlord insurance provides more wide-ranging cover for investors than building insurance. When settlement day rolls around you’ll need to pay stamp duty on the property, finalise legal fees and pay any adjustments for rates and utilities.
When the keys to the property are handed over on settlement day you are officially a property investor! All that remains is to organise a tenant and start collecting regular rental income. Then sit back and relax knowing your property is steadily rising in value to build your personal wealth.