The Business of Property Investing

Many investors never purchase greater than 3 investment properties and those that do sit in the top 8% of all investors. Often the reason for not exceeding 3 investment properties include:

  1. Incorrect finance structure that limits the portfolio and does not provide the needed flexibility to grow
  2. A negative experience with a property or tenant
  3. Fear of the debt used to purchase an investment property

Whilst this isn’t an exhaustive list, these 3 items can stop property investors from taking action to ensure that they provide for their future.

In working with and educating investors, the key points that I start with to mitigate the top 3 road blocks are:

  1. Finance structure
  2. Type of property and research
  3. A professional team

Finance Structure

Most property investors start by buying the family home and building g equity through capital growth over time and the principal & interest payments they make to their bank.

The first step when considering the finance structure is to mitigate the risk to the family home by splitting the finance on the investment properties with separate lenders. This ensures that the family home is not cross securitised with the investment property and therefore allows the investor to control the sale of property in the event that their circumstances change and they cannot afford to hold the investment property.

By splitting your borrowing between lenders, you are also reducing your exposure to an individual lender and therefore the risk of a change of lending policy.

The top 5 tips when considering a finance structure:

  1. Mitigate the risk to the family home by using a separate lender for the investment property
  2. Separate your home loan (non-tax deductible debt) to your investment loans (tax deductible or GOOD debt) for ease of reporting and accounting
  3. Ensure a valuation is completed on the purchase property and don’t use the equity in your home to cover any shortfall
  4. Only use a line of credit against your family home if you are “GREAT” at budgeting as it is like a huge credit card and can place you into further debt.
  5. Choose a lender that will re-limit your loan facilities without a fee, so that as you pay down your home loan you can reduce the limit and increase the investment loan allowing access to “GOOD” debt for further property investment.

Interest rate, fees and charges are always a consideration when choosing a lender, however the correct structure and flexibility should be the first priority to align to your investment goals.

Type of Property & Research

When considering a residential property the three main types include houses, units & townhouses with variations of these included, depending on the area. All property types have their benefits and critics, however each can be a good option for an investor depending on their current situation.

Regardless of the type of property chosen, the listed key principals should be used to avoid the pitfalls:

  1. Always obtain an independent valuation by a bank panel valuer to ensure that you are not paying an inflated price
  2. Seek property at the medium price for the area with an upper limit of $550,000 to maximise yield, capital growth and lower risk
  3. When building a new property, ensure you have a clause in your building contracts that makes the building pay the holding costs if the build runs over the agreed time frame
  4. Understand the cost of any bodycorp and ensure you factor this and rates when calculating your cash position
  5. Use historical figures for capital growth and yields to benchmark the property and maximise your investment

When buying a property there are fantastic tools that can be used to benchmark suburbs, properties and statistics. These are essential tools to ensure that you are making an informed decision that include RPData, Australian Property Investment magazine and PIA software.

A Professional Team

Like any business, you need to ensure that you have a great team around you to provide the correct advice and act as a sounding board. Never let one group railroad you into using all of their professional services.

You need to be comfortable with the team you build, as it is a long term relationship like any business.

Your team should consist of:

  1. Finance specialist
  2. Accountant/bookkeeper
  3. Lawyer (property)
  4. Financial Planner (insurance)
  5. Property Manager

Property investment can be both rewarding and challenging offering all people the chance to build wealth. By structuring your finance, sticking to key property fundamentals and building a professional team, you will soon find that property investing can be a strong strategy for wealth.

Article Source: EzineArticles.com
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