There are plenty of deals out there. The question is, which one is right for you at the present time? Well, that depends on two things, your goals and your investment strategy.
When you’re looking for a great deal, the first thing you need to do is figure out what you’re trying to do with your investment properties. In 20 or 30 years’ time, what do you hope these properties have helped you achieve?
Factor #1: Income vs Growth
Let’s say you buy a property in the suburb of Eaton in Bunbury for $320,000. The average rental in Eaton is $330 per week. If your goal is to have an income you can live on right now, this property alone will not meet that goal. But, before you decide if it’s a good deal you need to consider the long-term property appreciation as well as the rental income.
Property growth is often overlooked in favour of the short term cash flow that the rent generates. Sure, you need the rent, especially if you have a mortgage to pay. But the capital appreciation of the property is where you can really build your wealth. It’s a fact - property appreciation will always outpace cash flow.
Factor #2: Balancing Cash Flow with Long Term Goals
Many people invest to earn cash flow. That’s an important component, but you don’t always want to hang your hat on that alone. Capturing equity can be far more important.
For example, if there’s a property that’s worth
$430,000, but your motivated seller is willing to take just
$400,000. So you immediately earn $30,000 on that property. It’s an unrealized capital gain. It doesn’t go into your pocket, but you’ve captured the equity.
After putting down the deposit and setting up a mortgage, it’s yours. Experience in Australia tells us, that property appreciates in value (usually by double) every seven to nine years.
If you keep the property for say 10 years, it will probably be worth $860,000. Keep it another 10 years and you’re looking at an asset of $1,290,000. This is the benefit of being a long-term investor.
Factor #3: Mortgage – A Decreasing Debt
Your bank will set you up with a loan over let’s say a 30 year period. It doesn’t matter to them if the value appreciates or depreciates. They just want to get the money back that they leant you, plus their interest.
The great thing about this scenario is that you’re not paying the money back; your tenant is. Your tenant is paying down the loan. Your debt gets smaller and smaller.
There may be times where you’re going to have to put capital improvements into the property and there may be vacancies, but that’s okay. You’re still having someone paying down the debt. Less debt means the interest is smaller too.
Factor #4: Increased Rents
Over the lifetime that you own a property the rental market will change. You can expect to charge higher rentals in line with what’s happening in your neighbourhood. New developments such as schools, major hospitals and national sporting facilities all add value and increase the demand for rental accommodation.
Rental trends are upward trends. This is good news as higher rent means you can pay down any loans faster and free up equity in the property for your next purchase.
Sure, your taxes and insurance costs may go up a little, but not much. It’s safe to say that your rent will increase over 30 years and you’ll earn more cash flow.
It’s common to review the rent every 6 months or very year. Small rent increases that keep pace with the CPI are easier for the tenant to adjust to than one huge increase in 3 years. Your property manager can guide you on rent increases and what’s happening in the market.