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Property investment can be a great way to make money but, unfortunately, it’s not really as easy as those who have done it say it is.
There are several things you should take into consideration before investing in property and it’s important to understand what you’re getting into before you’re a slave to an indefinite mortgage.
Capital Growth vs. Positive Cash Flow
If you want to make money in property investment, it’s usually through one of two ways: buying low and selling high, or renting out a property that generates more income than what you pay in expenses (also known as negative gearing in Australia).
The first is referred to as capital growth and it’s essentially where you purchase a property at a relatively low price and have the value of it increase over time, either through the market going up or by adding value to the property yourself.
The second way of making money is through positive cash flow, which relies on finding a property where the rental income exceeds the costs of the property, including things like mortgage and insurance costs, manager fees, and council rates. If you’re buying to rent, then you need a place that will make you money rather than record a loss, so choose wisely.
Acing the Capital Growth Route
Opting to focus on capital growth is quite common for those who are looking to make a nice sum of money in the fastest way possible. That’s because you can have some control over how you can make money. You can wait for the market to go up or you can add value to the property yourself through renovations.
If you’re interested in doing some of the work, then you can do more than just cosmetic renovations. You could also try adding an extension or even a new dwelling onto the property. From adding street appeal to creating internal appeal, there are many opportunities to add value to a home and they don’t have to cost a fortune if you’re smart about it.
To maximise profit, you need to understand where you are in a property cycle, which means factoring both micro and macro elements into the decision making process. So, don’t just look into the condition of the property and research the city you’re buying in. Consider local influences (such as new infrastructure) that could boost or deflate property values as well as economic indicators such as unemployment, exchange rates, and interest rates.
Winning with Positive Cash Flow
If you plan on making money through positive cash flow, then you need to do your research to ensure that you’re buying a place in an area where rental income is high compared to the value of the property. This is particularly important in Australia, where many properties are negatively geared.
Familiarise yourself with the area and research vacancy rates in the area. If the vacancy rates are high, then this may not be the most desirable area to live in, which means it could be more difficult to rent out a property or sell it when the time comes. Remember, renters will consider things like proximity to shops, schools, public transport, cafes, and parks, and so should you.
Forget about costly high maintenance features such as extensive landscaping or pools. You may think a pool would be a big selling point but 40% of Australians believe that it adds no value to a property. Also, as an investor, you really don’t want to worry about a tenant ruining the pool through little or no maintenance.
Whether you choose to focus on capital growth or positive cash flow, the one thing that will stop you from succeeding is waiting too long to start. You can’t make money without taking the plunge, so stop waiting for the “perfect” time when the market is just right.