Ever Wanted To Be A Landlord?6 months ago
Many people dream of becoming a landlord but, in reality, few have the knowledge to do it. Countless books have been written and many a seminar has been conducted on the subject of property investing, and you can make millions according to the so-called "experts" in the field. The uninitiated may think it's easy but the reality is, becoming a landlord is not a ticket to instant wealth. Asking the following questions should give you a good start.
How large a deposit is required?
Only last year, it was possible to get 100% deposits. Gradually the loan-to-value ratios (LVR's) decreased to 95% and now it's 90%. That means you need at least 10% as a deposit. On a $200,000 investment that's $20,000.
What rental earnings are required?
While there are no hard and fast rules as to how much rental income is required, banks generally look at your income and expenses (which includes repayments on other mortgages). They also assess your capability in covering interest payments should there be no rental income, which is generally assumed to be about four weeks out of the year your property can be expected to be empty.
How long should one invest for?
Real estate property investment is a long-term proposition. The longer the period you commit to the better. There are no guarantees real estate values will continue to increase in the short-term.
Are there tax advantages to property investment?
There is one tax break that the majority of people do not understand; that is negative gearing. For example, should your mortgage interest be greater than the rental income from your investment property, you can claim that loss against your taxable income. The amount refunded is calculated on the basis of your marginal tax rate. For example, let's say you have a shortfall of $100 every month and you pay a marginal tax rate of 40%, you will get a refund of $40 against your mortgage interest. The higher your income, the greater the benefit of negative gearing.
What about problem tenants?
We've all heard about problem tenants being chronically late with payments or trashing the investment property. All states offer valuable information for landlords through Residential Tenancy Authorities. In the first instance it is advisable to have landlord insurance. Most major insurance companies will cover risks surrounding payment arrears and property damage.
Where are the best properties?
Ever heard the real estate saying.....location, location, location. Research the vacancy rates in the areas you're interested in. Some may have high vacancy rates, others may be historically low. The general consensus is, your best property investments are located within close proximity to shops, the central city business district, public transport, hospitals, etc. Lenders may not like certain areas, particularly rural areas. As a result they may ask for higher deposits or may not lend at all. Other lenders may not lend for high-rise apartment blocks. Do your homework.
How to decorate?
The key to successfully renting your investment property is simplicity. Imposing your taste on other people doesn't always work. Colours should be neutral or white and simple blinds as opposed to patterned curtains is a much wiser choice.
Apartments vs Houses
There is a significant difference between purchasing a single investment rental property, owned solely by one individual, or purchasing an apartment block which is considered a strata property with a body corporate. Several questions need to be asked with strata properties such as: is the body corporate experienced and well financed, is the building in good repair, is there a "slush" fund to cover major building repairs should they arise. While repairs and maintenance are shared among several owners, a major damage bill could still cost you a substantial amount.
Do I qualify if I'm self-employed?
This is where experience and knowledge work to your benefit. If you can verify your income with even two years' worth of profit and loss statements, bank statements, trading history, etc., your lender will finance a mortgage for a normal 90 to 95% of the loan-to-value ratio. Should you have difficulty verifying your income and require a low-doc loan, your deposit will need to be 20%, at least.
Rental property investment must be approached in a cautious manner, with your eyes wide open and your wallet firmly closed, until you have gained sufficient expertise.