It is important to give some thought to your property investment even before you start searching for a property. Here are some things we think you need to consider even before buying an investment property.
Do not buy an investment property without a plan. The great thing about having a plan is that it does not have to be right or wrong. There is no doubt that your goals and objectives will change over time. You need a plan to give yourself a starting point for where your investment journey will take you.
The first two questions to ask yourself are:
- What is it you are expecting to achieve?
- How long do you want it to take?
The best thing to do is work out where you want to end up, and you can work backwards from there.
Once you have purchased a property to make changes to the way it is owned or to sell it because it is not right for you is an expensive process. As an investor it can take several years to recover your initial purchase costs from the rental income.
You also need to ask yourself are you looking for a single investment property or are you looking to build a property portfolio to fund your retirement? There is no right answer to this question. You simply need to give some serious thought to what your long-term objectives are.
Do the research and try and work out what type of investment property will best meet your long-term investment objectives.
Where should you Invest?
Where are you going to invest? Part of this needs to be determined by your strengths, strategy and what your long-term investment plan is.
Your personal circumstances will significantly impact your income tax liabilities (both domestically and offshore if investing overseas) which occur through the ownership of investment property. Consider the following:
- Stamp Duty – Stamp duty changes significantly around the world and the costs can be truly eye watering. Make sure you understand the cost implications of buying both domestically and offshore. Many investors will find that it is far more cost effective for them to buy offshore rather than domestically.
- Income Tax – you need to understand how a property investment impacts your overall income tax situation. For many people earning income outside of the country where they earn their principal income is high advantageous from an income tax perspective. Others however, who are taxed on worldwide basis will need to give more thought to how they own their property investment – it might make more sense for them to own the property through a company.
- Expenses – you need to understand what your expenses will be an how you can off-set them against your income tax liabilities. In some countries you will be able to offset 100% of the cost’s others such as in the UK you will only be able to offset a proportion.
- Depreciation – asset deprecation can be a powerful tool for long-term investors, determine whether you can depreciate your assets over time.
- Estate and Inheritance Taxes – some countries have estate and inheritance taxes whilst others do not. If a country has these taxes, you will need to give some thought as to how they will impact your overall plan and strategy.
How many locations you want to invest in will depend on your specific circumstances. Our recommendation is that you track more than one market. I recommend that you look to track two different countries, and perhaps three locations in those markets.
As a minimum you should focus on countries for which you can easily determine and obtain the following:
- How property tenure works for domestic and international ownership
- Reliable market data
- transparent information on taxation
Access to Research
You cannot make effective investment decisions without having the right information. If you make assumptions or decisions based on inaccurate or misleading information you are setting yourself up for failure. An expensive lesson in real estate investment!
As an investor this is information which you should be willing to pay for, the reality is collecting this data can be expensive, but you should not be unwilling to pay for some of it. The cost of the information may be quite small relative to the impact it has.
Useful information to track includes:
- Demographic data – changes in demographics will influence rental growth
- General economic data – will help you to determine the point in the market cycle
- Macro Housing data – helps determine supply and demand
- Pricing data – average rents, values and yields should be tracked over time
Before you go off speaking to agents and searching for your investment property you need to give some thought as to what your budget is. When determining how much you are going to spend give some thought to the following:
- Purchase costs – you will have a significant amount of costs which come up when you buy an investment property which you will not be able to borrow, you will need cash available to pay them. These include:
- Stamp duty and other purchase costs such as transfer fees and registration fees – you can use our calculator to estimate what these charges will be for Australia and the UK for other countries you can search online.
- Conveyancing fees, you will need to have a conveyancer act on your behalf to transfer Title for the property you will find an estimate of these costs in our Buyer Guides
- Mortgage arrangement fees, if you are buying the property via a mortgage you will need to consider the costs involved in arranging the mortgage these could include brokerage fees, arrangement and set up fees and valuation fees
- Deposit – if you are buying the property via a mortgage (which we highly recommend) you will need to have an idea of how much you can borrow. The best way to find this out is by speaking to a mortgage broker, but as a rule you should work off the following. Domestic investment you can typically borrow 80% of the purchase price for a first investment which will reduce for later investments. International investments you can typically borrow 65% of the purchase price.
- Ongoing top up payments – in an ideal world your investment property would simply take care of itself and the income generated would cover your running costs. However, this rarely happens particularly in the first few years of buying an investment property, unexpected costs will arise, and you may not always have a tenant in place. You need to determine how much money you will be able to set aside to top-up any unforeseen costs.
Important notice: Proptech Pioneer and its associated companies seek to provide real estate investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, accountant conveyancer, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision.