If you are considering buying your first investment property, you may often get lost in the amount of information that is available to you. This article explains the 3 things that are most important to consider, so that you make the right decision for your own investment journey.
First, it is important to consider what your property investment goals actually are.
This involves actually understanding whether you are investing for short term income (ie: yield), long term wealth creation (capital growth) or a balanced combination of both. If you are influenced by marketing messages before you have a clear understanding of what you actually desire, then when buying your first investment property it may not perform the way you had hoped.
Second, you must understand the different types of properties and strategies that are available to you to meet your desired outcomes.
Not everyone needs the same strategy when it comes to property investing. Different types of properties will deliver different results in terms of rental yields and capital growth. It is often noted, that when a property has a high rental yield, this is commonly at the expense of capital growth. The alternative is also true. When you have a property with a high potential for capital growth, this is often at the expense of short-term rental yields.
Also, people have different exit strategies in mind when it comes to property investment. It is important when you are working on your strategy for your first investment property, that you understand when you are looking to sell the property, or if in fact you plan to hold the property long term and pass it through to your estate. The exit strategy certainly impacts on the purchasing entity and may help to determine if the property is to be purchased in an individual’s own name, or if another entity type needs to be considered.
You must also understand your personal circumstances, and seek the advice relating to your tax position and the impact that a particular type of property investment strategy has on the amount of tax you will have to pay. Again, this all needs to be resolved and uncovered BEFORE you start to even look at buying your first investment property.
The difference in the performance of a property over 20 or 30 years can be significant when the capital growth rate, for example, varies by very small amounts. Let’s take a $500,000 property purchased today (2018), with a 6% compounding capital growth rate. This property would achieve an additional $508,000 of equity over a 20 year period, compared with the same property with a 4% compounding capital growth rate (all other variables remaining equal). That’s a difference of $25,400 on average each year! Now, I don’t want to confuse you with the numbers as we use sophisticated software to make these projections, but the point is that making the right choice when you buy, will result in far more superior long term results.
In summary, be sure to understand your investment goals, plan your strategy before you jump in and buy, and then research the market to understand what type of property will deliver your desired outcomes. If in doubt, get expert help.