Strategies toward purchasing your first real estate investment

Real estate investment should be undertaken with informed opinion, research, expert advice and guidance and a complete understanding of the area in which you wish to invest. As well, a knowledge of property growth and the ability to add value, are integral. 

“Before purchasing your first real estate investment property, it is important to gain the right knowledge. There are a number of educative courses on real estate investment that will prove valuable,” said Stan Kontos, entrepreneur, business coach and speaker, SOL Results.

“For two or three months, study a particular area. You need to specialise in an area or suburb to gain an understanding of what properties are selling for and what potential there is for growth. Contact the relative council and find out what the council projections are for that area,” he said.

Kontos says that the next important stage is to select a property where value can be added. “The purchase of real estate as an investment should be made on properties where value can be added,” he said. This can be done through a general spruce up through tidying and painting and so on, or through a part or complete renovation. The other means of adding value is to find a property that can be subdivided.

An investment property should not be purchased for its growth potential alone as values can drop. The real estate cycle in Australia takes seven to eight years before a property doubles in value, dependent on where it is located. This can drop but generally remains stable, or plateaus, for around a year before the cycle begins again. Property prices in Melbourne and Sydney are currently on the rise again, with Adelaide set to follow this growth phase. Generally, Adelaide is a year behind the growth phase of Sydney and Melbourne. Adelaide is currently coming off the bottom of the cycle, heading into the growth phase. Predictions are for a good growth year in 2014.

In summary, Kontos stresses the importance of not going into real estate investment ignorant. Find courses, read books on the subject, find a mentor and talk to people who have successfully done it before, he says.

Next, he says, find a broker to sort finances and to tender out for the best deal. Having pre-approval in place for a loan is the same as being able to give the seller a cash offer. This is a valuable tool as the seller is considerably more enticed by a cash offer on a contract as opposed to a ‘subject to finance’ clause.

When applying for the loan, the bank will need to know your income and will check that you can comfortably make the repayments. Ultimately, you should own the home you are currently living in outright. An investment property is then a very minimal risk to the lender, especially as there is a very small gap between the interest rate, at 5% and the rental return, at 4-5%. In such cases, the bank will allow a Loan Value Ratio (L.V.R.) of 95%. For subsequent investment property purchases, the bank will lend an L.V.R. of around 80%, leaving a 20% gap plus any settlement costs.

Most financial advisors will say yes to negative gearing. Therefore, the purchase of an investment property can be considered based on the tax incentive and on its increased value potential through upgrades and improvements.

“Talk to an accountant before purchasing your first investment property. As mentioned earlier, the accountant will espouse this golden rule—pay off your home and borrow the maximum for your first investment property. He or she will also tell you that the property must have growth potential. Any growth then becomes your bonus,” said Kontos.

“My advice is to purchase within 10 kilometres of the city; near the beach; or near the café scene. Growth will be seen in these areas first. Avoid more distant areas as growth will be slower. Don’t purchase an investment property on the basis of tax concessions. These help but should not be the basis of your decision—growth in value should be the basis,” he said.