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Smart property plays for 2012

A devoted reader named Dianne asked for advice on buying two investment properties. Her interest followed a night at an investment seminar, which always makes me shudder (however, there are good ones, so I will refrain from being too judgemental).

The combined income of Dianne’s household is $115,000; the kids have grown up and are no longer draining the bank account; and they have a house worth $500,000 – of which they owe $100,000. They drive company cars, have limited expenses and plan to buy two apartments in Melbourne – one for $350,000 and the other for $277,000.

They want to use negative gearing to make it happen and she was desperate as she was viewing the properties the following day.

My job, if I am prepared to take it, is to pull off ‘Mission Possible’ – give safe guidelines for smart property investment. 

The simple rules

Dianne broke my first rule – never rush in or allow anyone to pressure you. Always purchase property after doing a lot of valuable research.

Negative gearing works if a number of things operate or happen, such as:

  • You are paying a lot of tax
  • The property and/or the area has a good history of capital gain
  • The type of property, and the location, is popular with tenants
  • You use a quantity surveyor or do your homework on the depreciation tax deductions you can claim
  • You have inspections done to ensure the property is sound and pest free
  • The property is new or relatively new
  • You take out landlord insurance
  • You go to a mortgage broker or two to get a great deal on your loan
  • You make sure your job(s) is safe as these make the whole game work
  • You get an accountant to check your numbers.

Many property investors use interest-only money and it can be a good idea to keep monthly payments down.

Reconnaissance work

In the limited space I have, I can’t cover all of the issues you should be switched onto, but let me emphasise some important points.

  • Pick the area where you think tenants want to live. You should check the newspapers and see what’s available.
  • Maybe turn up to some showings to see if lots of people are chasing properties in the area. Then talk to real estate agents to get a feel for the value of those properties.
  • A great service called Residex (www.residex.com.au) can give you the history of sales in specific streets and this helps you understand how good the suburb is.
  • On the negative gearing front, let an accountant have a quick look at your income, tax and plans for interest tax deductions to make sure you are not over-extending yourself.
Test the waters

Specifically, Dianne, I would buy one apartment first and test-drive yourself as a landlord. If it works well and your cash flow is still solid, then think about a second one.

Investments should be done just as a smart business owner approaches buying or starting up a business. A business plan, or in this case an investment property plan, should be drawn up with income, costs, tax outcomes, projections and forecasts to see where your investment would be heading.

Financial planners and other money advisers have software that can do these calculations for you, but when you work with these people make sure they don’t try to overcharge or over-influence you.

Finally, do a “What if I lose my job?” plan and see if you could cope with less income. Good luck!

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, January 09, 2012

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