Ready for the big decision? To buy anything for the first time is overwhelming at times and to buy a house or property for the very first time is always exciting and gives goosebumps.But remember not to get carried away in the vibe. It is wise to enter the Real Estate market to make money and generate Wealth for the future. You might be saving for months or years to invest in your first home, so let’s learn more about the investment property and help you utilize that savings in a proper way.
There are certainly many factors involved in finalizing an investment property that you shall be aware of for making a well established and informed decision. We have listed a few here below and others you can read out here(Link of How to choose an investment property).
Before we start, kindly note that this is just an informative article and by no means shall be considered as professional advice. Investment is a subjective matter and we recommend you contact an expert face to face to understand what works best for you.
Now let’s start!
TIPS TO KICK START FIRST
PROPERTY INVESTMENT
- Mental Preparation:
Buying a property is a decision that requires a strong mental preparation as it is a big and important stage of our lives. When buying for the very first time it is sometimes more overwhelming and scary. Therefore, it is necessary to understand whether you are really up for it or not. Real Estate is surely a cool way to make money but it’s needless to say that real estate is not made for every single person out there. You must consider certain points before investing such as the time duration, capital requirement, how unpredictable it can be, liquidity etc. If we talk about risks and unpredictability, it is something very common in all the investment options. Hence, you need to be prepared mentally if you are ready to take the risk involved along with the advantages and gains.
- Setting the goals:
Setting a goal is a crucial part of investment. If you hop on a street undecided where exactly you want to reach then you may not reach anywhere, isn’t it? At the same time let’s say you are well aware of where to go but not sure of which route to follow then it may take longer to reach the destination.
Likewise, if your goals of investment are not clear, you surely will get misled and fall for the wrong investment option. Hence, your – “Why shall I invest in property?(Link to why invest in the property)” shall be very clear and precise. Some may be planning to buy a house for their self use and some might be looking for rental income, some may be looking for passive income and others might be intrigued for gaining speedy capital Growth. The guidance for both can be different. Hence, prior to walking on the path, you must be aware of your destination i.e. financial Goals from the property and the route you want to follow i.e. you must know which method of investment can lead you to achieving those goals.
Along with the goals you must set a budget for your investment so that you don’t go overboard and put holes in your pockets.Budget will work as your mirror here and keep you inside the line.
- Research your way in:
Don’t believe in all the ongoing hypes of what is good and what is bad or what to follow and what not. Investing in a property can vary from person to person as per their motives. Accordingly, the advice and suggestions also vary based on the personal experience. Hence, do not believe in if someone out of the blues suggests to you that something is too good or too bad. Put your intellect and due diligence into it and research your way in. Be rigorous here and try to cover as much as you can, while researching and yet do not go bonkers on it as that can lead you to not taking any actions.
Research is life saving. It can save you from getting into a trap of anyone. Researching well means you are 80% there.
- Take Your time:
Is the real estate market going anywhere? It is going to be ever present with a trait of incredible growth over the period of time. Then, what’s the hurry? It’s natural to get jumpy and excited about buying a house for the very first time. But, what you must not forget is that you are buying a house for the first time and there are a variety of properties available and hence, you shall play safe and take your time before making any decision.
So, take your time and check out all the available options and see what fits your budget, goals and requirements best. It may happen that sometimes you get persuaded by your heart and end up paying way too high for a house and later regret not taking more time while finalizing.
Do not worry, you will always get some or the other deals on the houses. Important thing is to understand what and how you want your investment property to come out. Hence, wait and watch the market, talk to the neighbours, speak with other investors as well, analyse the reports of previous years and compare them with current reports. Sometimes you may need to take actions instantly but it is not advisable every time. Be careful there!
- Finalize where and what to invest in:
Deciding where and what to invest in is an important step as everything will certainly depend on that. This step will decide for you how much money you can make into the real estate market. Hence, keep researching about where i.e. in which suburb or cities shall you invest to get maximum returns. what to invest in? You need to understand what type of house you are up for? A house can be a robust house or single family house or multi-family house, 2BHK or more, fully established house or off-the-plan property or a house that needs some repair and can provide more value and many more. Hence you shall be very firm in the decision of what type of house you want to purchase and in which locality, reason being that it holds the power to change your whole finance structure and returns that you expect. Once that is decided, do not go off the track from it.
- Set a Budget:
“A Budget is telling your money where to go, instead of wondering where it went” – Dave Ramsay.
As it says, you must exercise the habit of putting your goals in a budget. Budgeting will provide you an exact path to walk on and if followed without deviation you may be saved from holding on a debt higher than you can afford. There are many investors who neglect the power of budgeting and often end up buying a house that they can not afford or which may seem affordable at first but eventually there can be some costs that they missed out while considering the house. Budgeting also saves you from overboarding.
Hence, when you budget, you set a limit on your spending and can always find a more affordable house. Now, you must consider all the costs (upfront and probable future common costs), how much down payment you will need to deposit, the EMI count for the number of years you are availing the mortgage, necessary expenses included, if buying in other suburb or city then your current residence – then commuting costs, etc.
This will provide you a clear picture of where you exactly stand right now.
Natalie Pace describes “A debt problem is at its core, a pure budgeting problem.” So, if you do not budget, you may end up overboarding and in-debted.
- Learn more about Loans:
It is absolutely clear that to buy a house, the investor will undergo a loan process, except if you are planning to go all in cash which is often rare.
This makes it so important to understand the types of loan available out there and what will work best for you, prior to the investment. Loan shall be chosen very carefully and wisely because if chosen wrongly it may end you in heavy debt as well. Loans basically are sanctioned based on your income, any other debts, credit score, type of property, assets, etc. The loans for an investment property may levy higher interest than property used for self consumption. Based on your requirement, budget and goals, your mortgage assistant will inform you what can best be offered. Yet you shall be aware of what all loan types are there. The following are options that you can research more about:
- Interest only home loan
- Bridging loan
- Construction loan
- Introductory loan
- Fixed home loan
- variable home loan
- Home loans on pensions – age & disability
- Non-conforming loan
- Line of credit loan
- Low doc loan
- Variable (principal and interest) loans
- Self employed home loans
- Split rate (principal and interest) loans
Then there are other ways of financing an investment property as well if you do not qualify for the more conventional loan option. The other option can be asset-based loan, 401K Loan, second home financing, house-hacking etc. which you may want to explore. Talk to an expert and professional loan officer to gain more clarity here.
- Know your Legal Obligations involved:
Even though all your work related to property management can be outsourced to a professional, there do remain some obligations for you as the owner of the house which must be abided by. You must know and confirm what all legal obligations apply in the city you decide to invest in. It may include the rights of your tenants, eviction rules, fair housing rules, security deposits, lease requirements, and more.The list of obligations and compliance vary from city to city.
- Understand Taxes and deductions available:
Taxes are an eternal part of income. Where there is gain, there is Tax.
Somewhere it was mentioned that you are bound to pay taxes but it is unnecessary to leave a tip on top of it. So, do not make that mistake yourself.
Learn in depth about the taxable income and all the taxes levied on your property investment income or hire a professional finance advisor who can guide you in this process but do not dare to skip this step.
Where taxes may seem a bit cruel, there can be many ways to save taxes and a professional can always find a loop in the system to help you with it. Owning a Real Estate can actually prove helpful in terms of taxes. By ATO’s grace, there are multiple deductions available on the taxes levied on investment property. If you want to understand more about how negative gearing or positive gearing can impact your taxes, how much tax is payable on capital gains and more like that, then you may check out tips to save taxes(Add the link for the same).
- Do the Cash Flow Analysis:
Cash Flow Analysis is extremely important to understand and realize where you will stand over the period of time and to choose the right investment property. Cash flow can be negative or positive. You need to choose which way you want to go. Doing the numbers prior to investment is a smart move as property investment is all about financial decisions.
Negative Cash Flow is when your overall expenses exceed your rental income. This might sound a bit strange to you as a first time property investor but it is not wrong when we say that there are many investors who invest even if it is in Negative Cash Flow. The reasons behind this is that they are in the race with a vision of long-term gain and eventually these properties may turn out very well; another reason is due expenses overriding the income, they save more taxes.
If your income is higher than all the involved expenses that will be termed as Positive Cash Flow. Sounds simple, isn’t it? It’s sort of easier said than done. It does not really mean simply subtracting your monthly mortgage from the rental income. You need to differentiate all the expenses such as recurring and necessary expenses, Mortgage EMIs, repairs and maintenance, taxes, insurance etc.
Estimating your Cash Flow can be a real work hence, involve a professional and experienced accountant to help you in estimating the cash flow for the property you have selected. Make it a thumb rule to not enter into investment without doing these numbers or else you will get into that category of investors who get carried away and lose all the potential cash flow in ignorance.
CONCLUSION
Investing in a property cannot go wrong if you follow the basic steps and rules and remember to avoid the most common mistakes(Link to avoid the mistakes article) that a lot of investors make. You may come across many articles and advises telling you what to do but be aware of the prevailing myths(Link to Myths article) that can unnecessarily scare you off.
Do not forget that property investment will give you the highest capital gains if held for a longer duration. You shall always check the demographics and the market prevailing prices of the property in whatever suburb or city you plan to get into. Most importantly do not be miser in terms of Research because it can turn all the tables around.
We hope you liked the article and it can help you in your primary decision making. If you have already crossed the line of being a first home buyer, do share your experience and advice down below for other aspirants to follow.
All the queries are welcome in the comment box too. Until next time, keep researching and keep investing!
