Acquisition and investment in residential real estate to supplement retirement income has gained popularity in Australia.
The acquisition of residential real estate to supplement retirement income has gained increasing popularity in Australia. And really, what’s not to love? You purchase a property investment that appreciates in value over time, while your tenant pays the mortgage. Oh, and let’s not forget the negative gearing and other associated tax benefits.
Given the historically lucrative price movements of investment grade housing, it’s easy to see why more punters are turning to bricks and mortar in a bid to build their nest eggs.
But becoming a property investor involves a lot more than sitting back and reaping the financial rewards. Approach this game without a sound understanding of the following nine fundamental rules, and chances are you will lose more than you stand to gain.
1. It’s a business
An analytical attitude is essential if you want to be a successful property investor. You would never pour your life savings into a business without first undertaking considerable due diligence and planning. Manage your portfolio based on a carefully-devised strategy that accounts for your current and projected financial capacity and long-term objectives.
2. Think big picture and be proactive
Once you’ve formulated a sound investment strategy, it’s time to take action. Look for opportunities to maximise returns and capital growth by maintaining your property to a high standard; undertaking cosmetic improvements to add value and potentially bump up your rental income where possible. Review your portfolio annually to stay on track and on target.
3. Surround yourself with the right people
You need an experienced accountant, buyer’s advocate or advisor and property manager to help administer your real estate affairs and I highly recommend seeking out a mentor who has achieved the success you aspire to. Although maintaining a professional team comes at a price, most associated expenses are tax deductible and the right type of support will pay for itself in super-charged capital and cash flow.
4. Put it in writing
Maintain accurate records and keep an orderly paper trail of anything related to your property investment(s). It’s critical that you claim as many legal deductions as you can each financial year in order to augment that all important cash flow but you need to do so in a way that won’t attract undue attention from the tax man. So document everything!
5. Don't DIY
Far too many beginner investors decide they can find tenants and collect rent monies without any assistance. But what they fail to understand is that a lot more goes into establishing a lucrative tenancy than whacking up a ‘For Let’ sign and moving in the first person that comes along.
A good property manager with an intimate knowledge of the local market is an invaluable asset, with numerous ways to improve your bottom line. So don’t be frugal when it comes to paying relatively inexpensive (and tax deductible!) property management fees. Going it alone will cost you a lot more in the long run.
6. Never miss a good rent review
Sustaining your portfolio is about maintaining a healthy balance of cash flow and capital. Your property manager should keep a close eye on the local market to ensure you always receive the best possible price for your property, through annual rent reviews. Remember, you want your tenants to cover as much of your interest repayments as possible.
7. Maintenance matters
The more responsive you are in maintaining your property, the more likely you will be to attract good, long-term tenants and the best possible rate of rent. You’ll ensure the long-term appreciation of your investment and your residents will be more likely to see this as a home they want to care for, not a hovel they couldn’t care less about.
8. Tenants are not your BFFs
While you should be considerate of your tenants’ needs, thinking of them as anything other than a source of income is not advisable. When a property investor pursues a more personable relationship with their tenants the problems begin. Keep it about the business of investing, employing a professional property manager to liaise with tenants on your behalf.
9. Appreciate depreciation
A professional depreciation schedule can save you thousands at tax time. Whether your rental premises are new or established, numerous items can be depreciated in order to claim a legal deduction and significantly reduce your tax debt, thereby increasing cash flow.
Successful property investors are business people first and foremost; learn the rules, stay informed and surround yourself with trusted, professional support personnel, and you’ll be one step closer to creating a lucrative retirement fund.