The essential ingredients when buying an investment property, ideally combine to deliver one that meets your budget, and contains the elements to drive growth and yield. It also requires this to be done in a cost-effective environment.
Generally, all these “ingredients”, apart from your budget, are variables. They are not fixed and are heavily influenced by external stimuli outside of our control.
Many factors influence and impact the market; local economic conditions, international events, significant weather events, vacancy rates, stock on market, rental yields, supply and demand levels, interest rates, etc.
These include greater demand than supply, low vacancy rates, solid yields (ideally above 4.5%) future short-term price growth rather than buying at the peak of a growth cycle, infrastructure and strong future job prospects in the area. Additionally, have suitable contingency measures in place, in the event of unforeseen change. By taking this approach, you will be better able to ensure the profits and manage the problems effectively.
When unfavourable change does occur, and you have planned and inbuilt some contingency, you are better placed to respond rather than react.
Variable factors to consider
Communicate with your mortgage broker and understand if you have the best available rates- this does not always just mean the cheapest. They are the best to advise you on the most appropriate rate for your circumstances. Don’t wait for the bank to call you if there is a better offer available.
Ensure before you start out that you are aware of the impact interest rate rises will have for you. Have a contingency fund to draw on. This can be borrowed at the outset. If you are on interest only- consider paying as though the interest rate is higher. The extra can go into an offset account so you continue to create a reserve. This will also help encourage discipline in relation to your discretionary spending.
Generally, vacancy rates respond relative to supply and demand fluctuations. If there is a sudden increase in supply, vacancy times can increase and rents can either stagnate or fall.
Ensure you have a good relationship with your property manager. If it is not good- do something about it or change agencies if you are not satisfied. Complacency is the trap many investors fall into. It appears too hard, so they stay with less than satisfactory situations as they do not know how to improve things. Negotiate well with a new agency and develop a relationship with your property manager. Better to be known as a person than just by the street address of your property they manage.
Take responsibility for knowing when the critical dates relative to your property fall due-note them in your phone. Include end of leases or renewals, due dates for various statutory charges, insurances, pest inspections etc. This allows you to be across the opportunity to discuss the market and potential rent increase/reduction, what maintenance might be needed etc, and help you plan and budget if more expensive items are coming up .
Be willing to be flexible. It is better to drop the rent than have extended vacancy. Ensure your property is well maintained and maintenance issues are responded to quickly.
New versus old dilemma
Tenants often prefer new property and when there is a lot of new product on the market it is challenging if you hold older, tired property.
This has played out in both city and some rural areas around the country. Developers have introduced an excessive amount of new product, often investment grade, and this has had a negative impact on the established market. In many areas this will be absorbed over time and balance will restore. Understanding the likely time frame is necessary to allow you to make tailored, strategic decisions. In some areas, often rural, if there are no fundamental drivers for population or jobs growth, this will have an extended dampening effect. This is where you may need to take a hard look at holding for the long haul- or an exit strategy.
This also assists in adding back some depreciation benefits for the investors, however you do need funds for this to occur. Often older units are bigger than new ones. Make the most of any advantages you have.
Make strategic decisions
It is wise to refer to your initial plan and desired outcome of your investment. Evaluate if continuing to hold your property, in changed circumstances, is going to enhance your overall results. It is sometimes better to “prune back the old wood” and get some new water shoots to give your portfolio a new lease of life.
Look at the big picture indicators. Market fluctuation come and go. Supply and demand has an ebb and flow and often if you sit it out, balance returns. Look at what is driving the imbalance and calculate how this will impact the mid to long term outcome. Discuss any plans with your accountant and property advisor to evaluate all the factors that will be impacted. Don’t react in fear and limit your profit by creating problems from knee jerk reactions.
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