Whilst there are many people out there who make a conscious career choice to build an investment portfolio as their primary (or sometimes secondary) source of income, there are also those who end up with more than one property under their belt for very different reasons.
David Forrest, Chairman of First National Real Estate Cairns Central talks about how more and more people, are finding themselves with investment property opportunities and what they are doing to make it work for them.
‘’Most people will sell their home when they decide to buy another, but this isn’t necessarily always the case. Some decide not to - usually because it isn’t a seller’s market and they would rather wait for things to change and put tenants in their property until it does.
Sometimes they end up never selling as they are happy with the status quo. Other times, the market can boom and by being patient for a while, this type of investor will have put themselves in a much stronger financial position than if they’d have simply sold up in the first place.’’
Society has changed a lot over the decades. The stereotypical days of buying a home, raising your children there and then retiring, are becoming less of the norm. We move around more, both geographically but also, in our relationships.
‘’Take for example a couple who get together in their forties or fifties and already own their homes independently of one another. Rather than move into one of them or sell both, many in this situation, choose to buy a new place together, whilst keeping their current properties.
This could be because it makes financial sense in the current market or more practically, because they really don’t want to lose their independence ‘just in case’ or even that they want to keep the family home to hand down to their children from a previous relationship.’’
Then there are the people who go overseas or to another part of the country for work, travel or study perhaps for a year or two. Their intention is often to return to the home they love, so why sell if they don’t have to?
‘’Home owning is still very much part of many people’s success metric system or the ‘Australian Dream’ as most of us call it. It provides financial and emotional security as it is usually where we spend most of our time when not at work.’’
And so another accidental investor is born. They can have the best of both worlds and whilst they might have to make sacrifices in other areas of their lives, this is usually a small price to pay to remain on the property ladder.
Whether you plan to invest in real estate or end up doing so accidentally, it is important to keep in mind that either way, the ATO will categorise you as an investor for tax purposes so getting professional advice is essential.
David has put together some top tips for those who find themselves in the ‘accidental investor’ situation.
1. Does being a landlord make financial sense?
This is an obvious one however, you’d be surprised how many people don’t give the financial side of things, proper consideration. There are upfront costs such as insurance and tax implications, so it is essential that you talk to a qualified financial advisor or to your accountant before making any decisions.
Go through your finances carefully and plan your cashflow to ensure you allow a buffer for those unexpected occurrences which life gifts to us from time to time. It is also important to remember that failure to plan, is a plan to fail. Select a trusted real estate agent and as part of the research for your plan, have the agent do a rental assessment of the home and discuss with what needs to be done before leasing the property. Some property quirks are overlooked by owners but will be picked up instantly by paying tenants. By talking you your agent, you will gain a thorough understanding about your legal obligations and rights.
When assessing your plan, keep in mind that property investment is a long-term decision which needs to be carefully considered.
2. Do your research
There are certain rules which need to be met before you can put your home on the rental market and exist to protect both the landlord, and the tenant. For example, does your house have working smoke alarms (these are required by law and must comply with the Fire and Emergency legislation that is constantly changing) and a pool fence that meets the legal requirements and has been approved by the relevant authorities? Make sure you have read all the guidelines but to be on the safe side, contact a reputable Real Estate Agent who can take these stresses away from you and give you expert advice.
3. Is your home suitable for tenants?
Keep in mind that it’s probable you haven’t specifically chosen your home for investment purposes, otherwise it wouldn’t have been an accident. Whilst you may have spent many happy years there, your connection to the property is likely to be emotional. Try to take a step back and see it from a potential renter’s perspective. Are there obvious cosmetic improvements that need to be made in order for it to be more appealing? Should it include furniture or would unfurnished be a better option?
Is everything in full working order? You don’t want the stove to suddenly fail or the air conditioners to stop working during the height of the wet season, so you will need to prepare in advance.
Remember, the longer the property remains vacant, the more out of pocket you will be. It’s well worth taking the time to give your home a thorough overhaul and mending the hole in the fence which you’ve been meaning to do for the past decade. We’ve all been there….
4. What’s included?
You can also make your property more appealing by including items such as pool maintenance or lawn/garden care in the tenancy agreement. Why not consider widening your audience by allowing pets? Make sure you have fully considered how much you’re charging per week, so you don’t price yourself out of the market – you need to match what it will bear. Again, use your agent to prepare a fully researched market analysis before making this decision.
Your agent will be able to bring you up to date with market facts such as vacancy rates and rental returns.
5. Keep records and work with your agent
Make sure you are organised and have copies of everything filed in a safe place. Your Real Estate Agent will send you monthly statements and an annual summary for tax purposes. Speak to your agent about them paying your rates and other items such as insurance so all of your cash flow is itemised on the annual summary.
Make sure you select an agent that does proper tenancy checks and is a member of a national tenancy database. They should also check past tenancies and the employment status of applicants. Time spent at this stage of a tenancy is important and can save you from encountering problems down the track.
As long as you get professional advice from your Accountant, Financial Advisor, Finance Broker and especially your Real Estate Agent, your accidental investment could turn into a nice little nest egg.