18 April 2022

A quick-start guide for beginner property investors

Emma McLaren
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Australia is a nation known for its real estate passion, with investors ranging from first homeowners looking to secure the roof over their family’s heads through to landlords with dozens of residential properties in their portfolio. With over 2 out of 3 Australians owning their home (mortgaged or not) as of 2018, it’s safe to say we’re a property-hungry market.

If you’ve been thinking about investing in property, you may feel overwhelmed when it comes to sorting through the data, perspective, shock headlines and options. Investing in a property is a significant financial decision for most. It makes sense that building background research is a process that takes time.

In reality, learning how to invest in property (and the common pitfalls to look out for) doesn’t have to feel impossible. By arming yourself with the insights you need, you can set yourself up to make a wise investment in your financial future.

Are you looking to take the plunge into the deep end? Here’s our quick-start guide for the key areas you need to pay attention to before investing in your first property.

Understand your financial position

Understanding your financial position isn’t as simple as checking the figure in your bank account. A range of factors go into the mix when applying for a home loan. These include your income, expenses, household members, debts, the size of your deposit, the area you’re looking to purchase in and more.

Whether or not an investment property is an affordable option for you depends on your position. By speaking with a lender, you can get a sense of your borrowing capacity and make a plan accordingly. They can also highlight ways to increase that capacity, giving you insight into the long term.

Secure pre-approval

Firstly, pre-approval isn’t the same thing as approval for a loan. New entrants into the property market can often find this part of the process unclear, so understanding the difference is essential.

Pre-approval comes in the form of an indication from your lender that they’re willing to lend you a certain amount of money. You can secure pre-approval either directly from a lender or through a mortgage broker. Working with a mortgage broker can open up more options in terms of varying lenders for those who aren't quite sure about their borrowing capacity. Not all lenders have the same risk appetite, and some are more open to ‘unusual’ applicants than others. For example, if you’re self-employed or working as a contractor, working with a broker can highlight which lenders are more likely to respond favourably to you.

A pre-approval is in no way legally binding. Neither you nor the lender are required to commit to a full loan. However, applying for multiple pre-approvals can be risky, as lenders need to check credit records each time you apply. If there are multiple inquiries on an account, the likelihood is higher that they’ll then refuse your application.

Clarify your investment goals

No two approaches to the property market are the same. What works for one investor could be a lifetime of headaches for another. By clarifying your investment goals, you’ll be able to identify what kind of property meets your investment criteria.

Property investment rewards different types of buyers, with both short-term and long-term outcomes achievable. Short-term property investors may be more interested in ‘flipping’ homes, investing in renovations to significantly increase the value of their property. Investors looking for more passive approaches may be more likely to buy a property, place a tenant, and watch its value grow year on year.

Understand whether you’re looking to make a short-term or long-term investment, considering all inherent costs and risks within each approach. Only then are you equipped to truly enter the property market with a clear vision for what you need.

Evaluate your risk appetite

Risk appetite relates to the amount of risk an investor is comfortable with to achieve their objectives. Some people are risk-averse, meaning they’re reluctant to take risks to make a gain. Others have a higher risk tolerance, willing to take some short-term unknowns with the goal of making a long-term win.

Several factors impact our individual risk appetite. Your financial situation and investment goals are most likely to contribute to this. If you’re cash flow positive week to week, your risk appetite may be higher. Your risk appetite may be lower if you’re looking for an investment property to return a neutral or positive cash flow outcome each week.

Run the numbers

Now for the boring part of the process: creating your budget. This isn’t as enjoyable as scrolling through home listings online, but it’s a necessary part of the process. Budgeting will help you understand how much you can afford regularly. By balancing your income and expenses, you can identify opportunities to stretch your resources or spaces where you need to be conservative.

Budgeting isn’t just about looking at the purchase price. Consider other costs, such as stamp duty, transfer fees, legal fees, account fees, property maintenance costs, rates, insurance, etc. Many of these costs can be offset against an investment property’s income to reduce your taxable income, but it’s essential to have a clear picture of what’s coming in vs. what’s going out.

Build a purchase plan

With your goals, budget, pre-approval, and an understanding of your risk appetite in hand, you can build a purchase plan.

A purchase plan’s foundation is its criteria. Define what it is you’re looking for based on your personal needs and make a shortlist of properties that match those needs. Once you’ve found a property you believe is the right fit, it’s time for more due diligence. Research the area, get an appraisal from your lender, check for any particulars on the block, and review the long-term growth potential.

Once you’re armed with that information, it’s time to make an offer.

Inform yourself

Property markets in Australia can change rapidly. Stay up to date with what’s happening in your area of interest and across the board to make decisions from a place of informed context.

Keep up to date with property news and consider recent comparable sales before commencing your hunt. That way, you’ll be able to pay a reasonable rate, not an inflated purchase price, for your investment property.

Keep your head in the game

Investing in property shouldn’t be emotional. This isn’t about your dream family home. It’s about your financial future.

Keep your goals at the forefront when you’re in the property market. They’ll help you focus on the long-term, evaluating each property against your defined criteria until you find a match.

The work you do today can pay off handsomely for yourself in the future.

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