Five pieces of advice experts give to first-time investors

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Mention to anyone that you’re buying your first investment property, and watch the tips fly in. Some may be useful, but many can end up being financially dangerous.

When it comes to property investing, the best advice you can get comes from experts in the field.

We recently interviewed our Managing Director and President of REIWA, Damian Collins, to get his five biggest tips for investors starting out on their property portfolio.

1. Land appreciates, buildings depreciate

An apartment may be more affordable than a house and produce higher rental returns. But there’s a reason why property experts generally recommend a house and land over an apartment for investors in the early stages of their property portfolio: You’re likely to earn higher long-term capital growth.

“The supply of land is limited, so well-located land rises in value over time,” explains Damian. “By contrast, buildings decline in value. In fact, as they age, buildings can demand increasing levels of maintenance.”

Bottom line, if your budget allows it, a house on land in an established location will grow more in value than an apartment.

2. Diversify your location

As a first-time investor it’s often your first instinct to buy a rental property in your own suburb. After all, you know the area well – and that’s a plus for informed investing.

But if you’re a home owner, you already have a financial interest in the suburb. Buying in your own backyard means you don’t get the benefit of diversity.

“Diversifying is one of the golden rules of investing,” says Damian. “And when it comes to property, diversifying means spreading your risk across different locations.

“This can seem counterintuitive because we usually know our local area better than anywhere else. But if anything happens that could negatively impact property values in your own neighbourhood – such as council re-zonings, changes to flight paths or a major demographic shift, the value of an investment property located elsewhere is less likely to be affected.

“If you’re not sure where to buy, expert advice can help you identify locations that offer strong prospects for investors,” adds Damian.

3. Think long term

Forget reality TV shows that suggest you can make a bundle with a quick property flip. There are good reasons to commit to holding onto your investment property for the long term – at least 5-years-plus.

CoreLogic research shows that when it comes to making a profit on the sale of a property, home owners tend to do far better than investors. A factor behind this, says CoreLogic, is that homeowners typically hold onto their home for longer. That means they get the lion’s share of long-term capital growth.

Damian points out, “Property can come with significant upfront expenses, most notably stamp duty. It can take time for your property to rise in value to the point where you have recouped these costs.

“Holding onto your rental property for more than 12 months also means you’ll be entitled to a 50% capital gains tax discount on any profit when you choose to sell.”

4. Choose a location with your head not your heart

Your choice of location is important, and it calls for considerable research.

“It can be easy to pick an area that appeals to you personally,” says Damian. “But as an investor you need to think differently – and buy with your head, not your heart.”

He points to four main factors that can help to pinpoint suitable investment locations:

  • Population growth – areas experiencing steady population growth mean a decent supply of tenants and potentially lower vacancy rates.
  • Infrastructure development – good transport links are attractive to both businesses and tenants, and that fuels rising property values.
  • Employment opportunities – areas where the local economy has a mix of industries often experience solid employment growth, supporting stronger tenant and buyer demand.
  • Supply – be sure to look at the supply side of the market you’re buying in. Areas with limited oncoming supply of new properties will likely benefit from increased competition among tenants and future buyers. This generates healthy rental yields, low vacancy rates and a stronger re-sale value.

5. Seek expert advice

There’s a lot at stake when you buy a rental property, and it’s important to get it right. Following the advice of experienced property experts, who know what to look for – and what to avoid, could be the best investment you’ll ever make.

For more expert insights into the fundamentals of property investment, download our free beginner’s Investor Pack, which includes our exclusive budget planning spreadsheet.

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