Property Investment Guidance

It is commonly said that you make money when you buy, not when you sell. However, often this lesson is not learned until you try to sell a property. I remember the first property I tried to sell. It was a two-bedroom unit in a small complex of eight. A lovely unit… only four years old in an upmarket growing suburb. I was moving to another state in Australia and wanted the property sold, to enable me to buy another home in Queensland.

The property took over 12 months to sell. Three contracts fell over due to finance issues for the purchaser. That was my first experience in selling a property. The emotional roller-coaster was challenging. Initial excitement when the offer was negotiated and accepted, followed by confidence when the contract was signed, followed by disappointment when finance was not approved for the purchaser. The final emotion was frustration when the contract fell over. This happened three times.

Prior to this experience I believed properties took on average three months to sell, depending on the current market conditions. A few years later, we decided to sell one of our properties. This time it took close to two years to sell.

The property was a 2000 square metre property in a beautiful coastal holiday town. The property had zoning that allowed for the development of eight two and three-bedroom townhouses. The property was ideally located on the main road, a couple of hundred metres from the shopping precinct and beach, had two street access and was very close to community amenities such as a child-care centre, school and bus stop.

One month after we purchased the property we were offered $70,000 more than what we had paid for it. We had no intentions of selling the property at the time. Later, on realisation that we did not have the experience, contacts or time to develop the property, we decided to sell it. The first two offers we received were from developers. The offered a 12-month settlement contract. They would pay an upfront amount, with the balance paid in 12 months. This contract suited them. They got to hold the property with little money down. Negotiations could not get the terms of the contract suitable to both parties, and both contracts stalled.

In hindsight we should have accepted the contracts. These were the first two offers we received. We expected more offers to come in that didn’t have a 12-month settlement term. The market turned, developers pulled out of the market, residential construction slowed down and our property took an additional 18 months to sell. Holding a property for an additional 12 months to two years is not good from a cash-flow perspective.

It is important to consider the type of investor you are, before you risk buying a property that is wrong for your investment strategy. Don’t assume you can just sell a property if you need to. When selling, the market is in control. The market determines when it wants to buy, what it wants to buy and for how much. This experience provided one of our biggest lessons in property investing… know what type of investor you are, and be that type of investor only.

Almost everybody is an investor or at least a potential investor. We choose to put our hard earned money in various investment that will give us returns and these investment schemes could include stocks, bonds, agriculture, education and even property.

When an individual pumps in money for the purchase of property with the intent of gaining returns on the investment then the property in question is referred to as investment property.

Although it may seem obvious to many that cash flow from property is almost promised, there are certain circumstances that could lead to minimum or no cash flow at all.

Take a look at some of the ways in which positive cash flow can be derived from property:

1. Income from Rental/Letting

Just like any investment, income from property will only be forthcoming if it is managed properly. In addition to the physical and the financial well being of the property, good management also includes a whole lot of other factors as well.

For example a study of the most expensive suburbs in Sydney indicates that there are certain attributes that attract high rent payers. Mathew Tiller, an NSW research analyst with PRD nationwide says that rental income is almost always determined by location.

Waterfront properties and those properties in close proximity to the CBD, shops, schools and places of employment are high-value properties. Properties that have nothing unusual about them will rarely attract reasonable rent.

2. Viable Options with No Closing Costs

When you sell a property, the buyer almost always asks that you pay all or part of the closing costs. This can be pretty pricey, and if you refuse to do so, you may have trouble finding a buyer. Instead of selling the house through traditional means, you can opt to keep the mortgage from the bank and finance the house to a prospective buyer.

Known as a wrap around mortgage, this philosophy means you can start making a profit quickly because it takes no longer to complete typically than renting the property out. By charging more interest to the buyer than you actually pay to your lending institution, you make a profit each and every month.

3. Manage Paying Unnecessary Taxes

Taxation will also determine whether one will be able to receive better cash flow. It is therefore critical to structure your investment property in a manner that allows you to avoid as much tax as possible. In Australia, the authorities will look at the following assumptions to determine the tax payable:

Whether the property is personally and directly owned jointly by husband and wife;
Whether both owners are foreigners and non-residents and whether they have a local income;
Whether there is no mortgage or other encumbrance on the property.

However, as you go about your business of managing your taxes, it will be advisable to seek guidance from professionals.

4. Add Value to your Investment Property

Value addition is the one concept that separates good investments from bad investments. This is a general idea which cuts across all business disciplines. For property, refurbishment its structures and surroundings will definitely change perceptions in the in the otherwise congested property market.

Examples in point are Darling Point and Dawes Point in Sydney. While the values of these properties are already sky high, they continue to increase due to value addition. Buyers and tenants always prefer to have that which they think goes beyond the money paid. That is the touch of class which may be all that is needed for property to attain a high cash flow.

If you choose to personally finance your home to an individual, you can make even more profit from improving your property. Often the buyer will want to make improvements to the home because they are living there and plan to own it somewhere down the line. This means you can get improvements made to the property at little or no cost.

If the buyer improves the property enough, you can even have the home re-appraised and potentially get a secondary mortgage on the it to provide a quick lump sum. Also because you are sure to get extra cash flow just from the amount the wrapee is paying every month, you will more quickly be able to pay down the principle.

This means when they are ready to purchase the property out right, or when they leave and you sell it to another party, you will have more equity in the home and therefore receive a larger profit.

5. Use Loans Effectively

If you are in the business to develop and sell or buy and sell, lending institutions may be of great help. Therefore, an increase of property equity will be of much significance. When extending loans, commercial banks always want to know whether it will be possible for the borrowers to pay the loans advanced.