If you want to invest in property, how do you know which property is a good investment?
Most so-called property gurus will always advise location, location, location. This could be true if you are one of those investors who want to "buy and flip", meaning that you buy at a low price and sell at a higher price and as a result making a profit. If you are the builder slash handyman type you might want to buy a dilapidated property at a reduced price in a good area, renovate or upgrade, sell at market value and make a profit. In both instances, the investor has to use his or her own money as the bank will not give you a mortgage loan to buy an under value property.
One thing to remember is that when buying a property to stay in yourself is always better than to pay rent to a landlord, but this cannot be considered as an investment. You might be able to sell the property for a substantially higher price than the original purchase price let's say after ten years, and think that you have made a profit. Most property owners selling their home forget to calculate the interest they have paid on the mortgage loan, fees, property service rates, transfer costs, renovation, and maintenance cost. In most instances, after doing the calculations sellers realised that their home was definitely not an investment.
The best advice I can give you is to invest in buy-to-let property. Your risk is very low as you are only investing a small amount of your own money as a deposit and fees. The property will be financed by the financial institution offering you a mortgage loan and the rental amount received from the tenant will, in most cases cover the instalment and the other expenses. In a few years time, you will have a fully paid asset which will provide you with an inflation linked sustainable income for as long as you keep the property.
You might say, fair enough, but how do I know which property will be the best to buy? My answer to you will be, the one that makes most financial sense. Let's say you have shortlisted 3 properties and want to know which one makes financial sense. You have to determine the rental factor by doing the following calculation for each of the 3 properties:
Monthly rental income divided by all monthly expenses - $350/$300=1.16
In the example above the rental factor is 1.16. Rental factors of 1 or above mean that the property is cash flow positive. A rental factor of 0.7 and above means that the property will have a slight shortfall which means that you will have an out of pocket expense. As the rent escalates annually this amount will become less until the property breaks even. Property with a rental factor of below 0.7 is considered not to be a good investment as it will take more than 3 years before it breaks even.
It is obvious to buy the property with the highest rental factor and if available, with a rental factor above 1.
The last word of advice always treats your property investments as a business i.e. manage it properly, use it as a tax deduction incentive and never take surplus funds to buy a big screen TV or new vehicle, always invests surplus funds back into your business.