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5 Important Property Investment Strategies

December 7, 2012

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1. Equity
Most people use equity from their home to help buy their first investment property. Then you can use the equity from both your home and investment property to buy your next property. This makes owning a portfolio of properties easier over time.

But to use this strategy, it’s important to research how equity works and get an idea where you stand. It is also important to note that with this strategy you should always protect yourself. It is risky, and therefore not advisable, to use all your equity to invest if it puts you in a financially vulnerable position (ie. with no access to funds in an emergency).

2. Depreciation
Generous tax breaks – including depreciation- mean that your investment property is mostly paid for by the tenant and tax savings. And in the interest of getting as many tax deductions as you can, always use a professional quantity surveyor to give you a depreciation schedule -don’t let your accountant do it for you.

3. Negative gearing and positive cash flow
Negative gearing means you pay money towards the property each year because the total cost of the property is more than the total income of the property. Positive cash flow means you make money from the property each year (total income is more than the total cost). That is after taking into account all costs associated with the property, and all income including tax breaks. Not knowing how much a property is going to cost you per week before you buy it is a mistake many property investors make.

Make sure you’re familiar with how negative gearing works. Negative gearing is the most popular way to start investing in property, but you must be able to contribute funds each month towards the property. In time each property will become positive cash flow, and then you will not have to contribute any additional funds.

4. Investment property research
It is important to get the basics of property investing right. Thankfully, if you do your research it’s hard to go wrong. Always buy in sought-after locations, close to transport with easy access to schools and amenities. This means you are not likely to have any problems finding tenants.

Also, don’t make the mistake of only looking in the suburb where you live. You can buy anywhere suitable in Australia, so don’t restrict yourself to a place around the corner.

It is also essential to diversify your portfolio. Once you buy in one location, it can be tempting to buy again in the same place. However, that approach does not spread your risk and help you diversify your investments.

For a comprehensive list of questions you should ask about a property when looking to buy, download this property research questionnaire from The Successful Investor website.

5. A house or an apartment?
This is a topic all by itself, and there is no right or wrong answer, as both can perform well for you. It is important to buy what suits your budget and cash flow, and the type of property the location is in need of.

Credits:  Michael Sloan, Director of The Successful Investor.

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