While shares and other market instruments may hog the headlines in the finance pages, the finite supply of good residential property and the opportunity to make a profit using a lender’s money opens up the opportunity for substantial wealth creation.
- But only if you stick to five important rules:
- Buck the market trend: buy when sentiment is down.
- Don’t overstretch yourself.
- Buy in a recession-proof area.
- Acquire a second property when the rental income of the first is covering 100% of the costs.
- Lastly, aim to pay off the bond on each property within 10 years.
Location is most important. Picking a location that will lead to good price growth is easier said than done, but you can get someone to do the research for you. Beware that the market is fragmented – don’t go with a small developer in a one-off project. You want reputation and a track record. A good developer has done all the homework to do with location and infrastructure.
Do your research on the future of the road network in your target area. Buy in a place with easy access and avoid congestion. Suburbs with poor access usually see low rises in value.
Also, don’t buy in a highly competitive market segment. Don’t buy property where someone can come to market with a similar offering right next to you. You want to be sure that there’s a limited supply of the kind of development you’re buying into. Find a niche market, like secure complexes. They will be more attractive in the long term. Security can mean a property climbs in value.
Once you’ve decided the development or area is suitable, find a property that offers the greatest chance for price growth and be sensible with how you dress it up. Look at surrounding prices and don’t overcapitalise – you want a small house with a good address. This will help you gain when you come to sell. Always consider resale value: don’t make yours the most expensive house in the area.
You can waste money by installing extravagant finishing’s. No matter how much you may like the idea of a tin roof, for example, you will eliminate potential buyers by putting one on because the perception of maintenance costs is important. You must know your public. Another example is having paint all the way down the walls to where they meet the garden – there is a perception that the long-term operating costs will be higher. Insulation, efficient design, using gas instead of electricity – there are many ways to make the running costs lower and raise the home’s value in the eyes of potential buyers.
Banks tend to know their onions – if they’re not prepared to lend you what you’d like for a property, or if they don’t see it as a stable investment, there’s a good chance it isn’t. You can reduce risk even further by opting to buy in a new development. If you buy newly developed properties, maintenance will be low for the first 10 years anyway.
Once you’ve bought the property, find a tenant – one you’ve screened properly – and stick with that property.
Be prepared for bumps along the way. Ensure you have enough money in reserve to cover three months’ bond payments on any property you buy. Be disciplined about keeping that money aside.