The Golden Rules of Investment Properties

Choosing an investment property that’s right for you is almost like searching for the Holy Grail. Too many factors can cloud one’s judgment and speculations are rife within the real estate sector. If you’re lucky enough to have the advantage of years and years of knowledge then the risks and rewards may not seem that great; however if you are time poor and don’t have decades of knowledge when it comes to investing, there are a few golden rules that you need to consider before plunging into an investment property.

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Have you ever thought to yourself “I would live there” when scouting for an investment property? This phrase can play into dangerous territory as you need to remember that this property isn’t about you. Property investing should be factual and based on monetary decisions. When that phrase is uttered it can at times be a warning sign that there are some emotions being played out.

If you think that “the unit is too small” or “the kitchen is too tight” or “the balcony isn’t big enough”, take yourself out of the equation and concentrate on the bank’s perspective. It is the bank after all that will have to assess the capital growth year after year.

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If you’re lucky enough to posses your own magic 8 ball that will reveal to you the next suburban hot spot, then kudos to you. However, for all other investment property seekers, the chance of finding the next hot spot is slim. Even the heads of RP Data, Residex and Australian Property Market never claim to be able to pick the market.

You may live or work in an area close to your desired investment property, thus enabling you to tell whether the area will have an upturn; but then again, what if it doesn’t? There are of course, plenty of investors who have purchased properties in desolate suburbs and turned out a massive profit; there are also companies who can help you do it, but there are also plenty of investors who have gone nowhere or even gone backwards.

It might seem boring, but especially for a first time investor, the benefits of buying a property that has consistence growth of 5%-10% far outweigh the risks associated with a property that is up 50% on year, down 20%, down 40%, then up 10%.

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Do bargains ever really exist? “Bargain” properties are usually those that are not in the best locations nor are they in short supply or in great demand, so nobody is pushing up the price. A bargain on sale day may make it seem like the buyer is saving $50,000-$100,000 off the asking price or previous sale price but often these owners will tell you later on that it wasn’t as good as they had initially thought.

Ask yourself whether you would rather get $50,000 off a $500,000 property that grows at 5%pa or pay full price for a property that grows at 7%pa? The latter option would be worth almost $170,000 more after 10 years.

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The only guarantee in life is death and taxes right? So why do so many people jump at the prospect of a rental guarantee? Sure, if you’re able to purchase a rental property and receive an utmost surety that you always get cash coming in to pay your mortgage, why wouldn’t you jump onto the band wagon?

However, while some guarantees are genuine, some are used to merely push up the expected price of the investment. For example: If a $500 a week rental equates to a $500,000 unit value; if they then artificially inflate the rental to $550 a week, some buyers would then think the unit is worth $550,000 – an extra $50,000 more. The developer could then pay the extra $50 a week rental from the guarantee, costing him $2500 a year. Even if he guarantees it for two years, he will still net a $45,000 profit.

The real point should be that through careful planning, and by making the right purchase in a really good location and by placing it on the market at the right price, this should result in a constant queue of people wanting to live there - so why would you need a guarantee?

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Often developers will claim that they have already sold tens or hundreds at a particular price. They stir up our need for social proof, by essentially telling us that hundreds of people can’t be wrong. Or can they?  Take a second to compare a new development with a second-hand equivalent and then consider whether it’s worth paying the premium for it to be new. Would you rather the flashy apartment that has all the associated risks or the same valued house with a backyard that would house a family who are likely to stay for many years as renters?

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If you know what you are doing, then by all means - throw caution to the wind and the possibility to make a profit from any property in any market is likely. Unfortunately, we’re not all experts or fortune tellers or geniuses, therefore it’s best to play it safe and build your portfolio gradually along with your expertise. The faster you try and make a profit, the more risks you are more likely to take and the sooner you may lose the lot.

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