What to consider if you’re thinking of investing in rental property
If you’ve even glimpsed at the news or the current real estate market, you’ll know WA desperately needs more people to invest in rental properties. The rental housing crisis presents new opportunities for first-time investors, who are almost guaranteed to find tenants in an extremely short timeframe. Plus, you’ll be supporting people who are in desperate need of rental living — there are opportunities on all sides.
However, that’s not to say you should jump in, guns blazing, and snap up the first property you see. Like any large investment, it’s vital that you do your research and know what lies ahead in your role as a property investor.
1. Plan ahead.
The property market is somewhat unpredictable. You need to make sure you can effectively manage (and survive!) periods of loss. At some point, you might be forced to lower your rent or have unexpected property repairs and maintenance (like a new retic system or air con unit). It’s also still up to you to pay council and water rates. And, despite a favourable renting market today, there may be times in the years ahead when your property is vacant. If it is, you’ll suddenly be down a passive income stream, but still have the mortgage repayments to make.
2. Ask yourself, “why?”.
Why do you want to invest in rental property? Perhaps it’s to maximise tax through negative gearing, you’re aiming for capital growth, or you like the idea of an additional income stream. If you think about it, the answer could affect the location and the type of property you buy. Let’s lay out a few examples.
Additional income.
Looking for additional income? You’ll want to ensure the rental income exceeds your loan repayments as well as all operating expenses (council and water rates, repairs and maintenance, that kind of thing). One way to ensure this is by putting a large deposit down on the property purchase to keep your mortgage relatively low.
Capital growth.
If, like many other investors, you want capital growth, be prepared for inevitable market fluctuations. Although the market is all over the place at the moment, property prices in WA were stable for several years before the pandemic hit. As a result, many investors had negative equity in their investment property. These investors have only recently been able to sell and break even or make a small profit, which is why so many investors are jumping ship and selling their properties. This is feeding into WA’s rental property crisis.
Property development.
Property development is a popular strategy for income creation. You’ll need to buy a property on a generously-sized block that allows subdivision. Always check this when buying a property — the real estate agent will know whether it’s eligible for subdivision, but you can also check yourself with the council. Sites like Reiwa also show property listings with the block size and zoning.
3. Purchase to please.
Even in this marketing, you’ll have trouble renting a property if it doesn’t appeal to tenants. Do a bit of research to find out what people are interested in. For example, let’s say you’re looking to buy a four-bedroom, two-bathroom house — this will most likely attract families. Is the property near (ideally, within walking distance to) good schools and parks? If you’re buying a one-by-one apartment, this will probably attract a single person or an established couple. Is there public transport nearby? Does the property include a parking bay and storage unit?
It’ll help to speak to your local real estate agents and property managers; they’ll know exactly what people in their suburbs are seeking.
4. Invest in professional management.
You’re already investing so much in your property. It makes sense to do it all properly. That includes investing in professional property management. Property managers know the market well — it’s their job to. A good property manager will give you a heads-up when the market looks like it’ll shift, and can help you navigate those changes. They’ll also help you negotiate a fair rent with the tenants, and help you increase or lower it appropriately depending on market conditions.
Your property manager will also be the middleman between you and your tenant, which means there’s far less direct communication for you (unless you want to do that).
5. Finally, get expert advice before you buy.
On top of real estate agents and property managers, it’s wise to talk to an accountant about your investment strategy. If you don’t have one, that’s even more reason to see an accountant. They’ll help you create an effective strategy, let you know what’s tax deductible, and also get a depreciation schedule prepared after you purchase a property.
An accountant can also advise you on what name and tax structure you should buy the property in. Different tax structures have different benefits, and this is an area many investors aren’t aware of. The right tax structure for your circumstances can save a lot of tax when you decide to sell, and ensure you get the best tax advantage during the ownership of the property.
When you’re ready to talk about entering the property investment market, we’ll help you get started on the right foot.
Contact Ascent Accounting now to get started.
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