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How do you spot a good Investment and what are the things you should look at?
Thursday, April 01, 2010
Thank you to all those people that came up with suggestions for newsletter topics, we'll try and cover those over the next few months.
One theme that came up in a few suggestions was "how do you spot a good investment and what are the things you should look at?"
Obviously you should seek individual advice on what suits your income and your goals from your professional advisors and we cannot, and would not give any financial advice, but we can give you some things to consider.
With the disclaimer out of the way let's look at some general principles of investing in property.
When looking at investing in anything you should be clear as to what your goals are. Are you investing for a long term capital gain, is cash flow important, what are the tax implications and how does it fit in with your portfolio of investments in other assets such as shares or superannuation.
Some of the main things to consider are:
- What cash have I got to put towards the property
- How much can I borrow and what will the repayments be (allowing for increases in interest rates)
- Will I have trouble renting the property to a good tenant and what will be the gross income (income before expenses)
- Will the property cost a lot to maintain
- What will the net rental be after paying all expenses and the mortgage
- What are the tax implications if the property is negative geared
- Is there a tax benefit for depreciation allowance and how much will that be
Regarding what type of property as in a townhouse, apartment or house, this will be a personal choice to suit your goals but generally a new apartment will result in small maintenance and repairs but you will be paying strata fees, while an old weatherboard house will most likely have a large maintenance bill resulting in less net income.
With vacancy rates still below 2% and rents continuing to rise, it may be the right time for you to start your portfolio or add to it.
If you are thinking about investing in property please contact me to discuss further or even to get an idea of what you could purchase and do some scenarios on rental returns and how that fits in with your investment goals.
An example of calculations to look at would be:
New 2 bedroom apartment with parking space
- Price $350,000
- Rent $350pw ($18,200pa)
- Rates $500pa
- Water Rates $300pa (not including usage)
- Management $1,300pa
- Strata $2,000pa
- Depreciation allowance (tax benefit) $3,000pa
Rent $18,200
Less
Expenses - $4,300
Mortgage repayments - $22,800 (assuming 80% loan at 6.65% P&I)
Net income - $8,900pa
So there is a shortfall of $171.15 per week before the tax adjustment is done for depreciation of $3,000 ($57.70 per week).
You should also consider your costs regarding the initial purchase such as stamp duty, conveyance fees, bank fees, etc.