Be wary of any expert who tells you to use the equity in your home to buy an investment. Yes, lots of people do it; and yes, it can look good on paper. But the whole purpose of investing is to give you more security. And security is owning your family home with no mortgage. Your family home is precious. It should be sacrosanct.
Taxation and negative gearing is another huge consideration for investors. Expenses can be offset against income, lessening the blow. However, the accountant Austin Donnelly summed it up best when he said, "You are better off sharing a profit with the tax department than keeping a loss to yourself."
Safe Investors make sure that all the costs - mortgage, rates, the whole lot - are covered by the rent from the property. They never use negative gearing. This way, if they lose their jobs, they are safe. They are always playing it safe. They keep saving and buying, saving and buying, usually for many years. Sure they break the investment rules of the experts. But here's the irony: these investors are worth a lot more than most experts. There's a clue here.
Many would-be investors are caught out when they purchase an investment property.
The reason being the yield is simply miscalculated in many cases, leaving the new investor having to find additional finances in order to cover the mortgage repayments.
The stated return in the agent's advertisement seemed a plausible 6% pa. With interest rates at around x%, the investment seems to stack up. But does it really? It all depends on what basis the yield is based on. The gross yield, or the net yield?
The quoted gross return of 6% can be whittled down to as little as 3% when expenses are factored in. Whilst the investor takes 6% pa, after expenses they are only keeping 3%, leaving an unexpected gap in between income and repayments.
Annual Income divided by Purchase Price x 100 = Gross Yield %
Annual Income minus all expenses divided by Purchase Price x 100 = Net Yield %
There are some positive cashflow properties out there even based on the asking price. But you can easily create a stress free investment buy adding in more deposit so the rental income covers all outgoings. Then, to be even safer, make sure there's three months expenses in the mortgage account. That way even if the tenant leaves theres plenty of time to find a new tenant without having to worry.
For help finding the right investment property contact us on 07 5580 9989.