Property investment is a time-tested way for Australians to make money and, in many cases, build large fortunes. However, it’s very easy to make mistakes and go down the wrong road when getting started in real estate investing, so a conservative, common sense approach is almost always the best choice.
One way to do this is to focus on the aspects of investing that you can control. These include things such as Cash Flow, Depreciation benefits and Appeal to Tenants. These factors are all completely within your control. Unfortunately, many people make the mistake of focusing on factors they cannot control, such as appreciation. A lot of investors get into trouble viewing appreciation as if it were a stock market point-and-click game, which it isn’t.
But focusing on Cash Flow will ensure you have a positive return and can hold the property in good times and bad. With such low interest rates, you need to make sure that cash flow from the property will be enough to cover your expenses. Say you invest in a $500,000 property that you can rent out for $750 per week. At the end of the year, that’s almost $39,000 in potential gross income.
But things don’t always go perfectly. There may be months when you have no tenants. You’ll also have a number of expenses to cover, such as loan interest, insurance, taxes, maintenance, property management and the like. Still, even if you spend $30,000 on expenses, that’s still $9,000 that’s all yours at the end of the year – a good return. Even if you are planning to sell your property over the next 5 years, make sure you choose one with good cash flow potential, because you want a plan B if you run into problems.
The next factor to focus on is maximizing your Depreciation tax benefits that you are able to claim. A new property will have far more in fixtures and fittings that can be claimed against your tax. This usually can equate to a tax write off of $12,000-$24,000 and depending on your tax bracket that translates to real money in your pocket. If you pay 30 cents tax on each dollar you earn, you will save $4,000-$8,000 that the tax man gives you to help fund your property investment.
The final factor to focus on is making sure your investment property will Appeal to Tenants. As a rental market starts to soften, quality properties will continue to attract quality tenants. You know, the kind that continue to pay their rent and treat a property with respect and don’t mind a rent increase when it is justified. Generally speaking they are usually more pleasant to work with. You will attract a quality tenant when a property is clean, well presented, fully maintained and has features like air conditioning, lock up garages and modern finishing.
So even though appreciation is the factor that can make you the richest, it’s also the factor you have the least control over – therefore it isn’t one you should focus on. Take care of the first three factors, and you are almost certain to achieve success; luck into appreciation as well, and you could do even better than you’d dared hope.
But the point is that even without appreciation, if you have Cash Flow, Depreciation, and Tenant Appeal, you’ll still do well and can hold the property in up and down markets. When it comes to real estate investing, these three factors are your best friends. This is what the smart Perth property investor who’s not interested in taking risks focuses on.