Doing your homework when buying an investment property

Posted on: January 28, 2014
Posted by: Bob Budreika

Balancing investment property risk vs gainThere’s been a swag of articles recently about the huge increase in investment property ownership which is now more significant than the first home buyers or second home buyers market combined.  I suspect that self managed super is becoming an increasingly popular method of purchase which might reflect the large amount of advertising and promotion by developers and property marketers around super as a way to get into the property market.

I wonder how many of these investors took the time to do their homework and consider all aspects of their property investment?

From our experience we know this is rarely done because property is a very emotive investment and everyone knows you can’t go wrong with property (???).

We are able to calculate the internal rate of return (or average yearly return) of holding a property over a given time frame using the expected cash flows.  This will include but is not limited to; the initial purchase, rental income, tax advantages, holding costs and sale proceeds.  Many people incorrectly base their overall return on simply the purchase price and sale price and give no consideration to the net cash flows that occur each year over the term of the investment.  Doing this exercise correctly provides a more measurable and realistic assessment on which to base a decision.

After all, it’s a major outlay – especially if there’s debt involved, so purchasers should be making informed decisions based on the facts and not emotion.  Unfortunately, if commissions and brokerage are part of the deal then there is likely to be bias in the sales process.

The key point is to do your homework first on any investment purchase based on what you want to achieve (your objectives) and then consider all the factors to ascertain the potential risk return reward.  Your decisions will be based on investment principles and not just emotion.

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