How to create wealth through income property
March 21, 2018 / Written by Rich Harvey
By Rich Harvey, Founder & CEO propertybuyer
Income property (buy-to-rent property), is an attractive, tax-efficient investment and a relatively simple way to earn passive income on a monthly basis. Simple, however, does not always mean easy.
While we’ve all known or heard about someone who has made significant wealth for themselves through income property, not everyone manages to make a success of it.
Is there a secret to building wealth through rental property? Below is advice to heed if you’re thinking about it.
Understand the risks and costs
The first step to take before deciding on investing in income property is to get clear on the risks and the expenses. Boring and potentially depressing, yes, but many first-time investors sorely underestimate the ‘hidden’ costs and the potential risk they’re taking on when they start.
You may think you’re already up to speed on this, but are you fully aware of all the risks that come with the specific type of property you’re choosing? How about the mortgage option you’ve gone with? Do you have a good idea of the monthly upkeep and are you clear on how long can you afford to have the property vacant? What is legally required of you if a crime is committed by your tenants or on your property? How much time are you able to dedicate to fixing things like leaky taps, or are you able to afford a good property manager?
Don't forget to plan for a bump up in taxes, rising interest rates, insurance, management, utilities and the reserves for major repairs (like a new roof and other serious expenses).
While there are many benefits that come with owning income property, there are also risks and costs that you shouldn’t underestimate. A successful investor can see all the potential problems and has a plan for every eventuality.
Speaking to a professional or a trusted advisor before you commit is critical. You don’t want to run into any nasty surprises that force you to sell too early.
Be tax savvy
As a rental property owner, you are entitled to certain tax breaks. For example, your insurance, maintenance, repairs, legal and professional fees may all be deductible. There are also multiple ways of structuring your investment to ensure that you’re not paying more tax on it than is strictly necessary.
Because a property is such a significant investment, it really pays to be aware of how you’ll be taxed on it and able to make decisions that will save you money in the long run.
Paying even a fraction more than you need to really adds up when you consider how long you’ll own that property and how long you’ll take to pay off the mortgage. Being smart in this way can really save you’re an enormous amount of money over time.
Speak to someone with experience in property or rental income to find out how you can save on your investment.
You’ve heard it before - but it is always worth repeating. The location of your property is not a decision to be made without thinking ahead.
When you’re buying for investment reasons, you have to look out for locations that have high rental demand. That usually means that major facilities, such as schools, universities, commercial hubs, parks and shops are in close proximity. It’s also important to be acutely aware of the potential for oversupply in future.
Buying income-producing property requires a very different mindset to buying a home. While home buying is usually is a very personal purchase, an investor buys a property because of its value, the income it will generate and its potential for capital appreciation. Don’t lose sight of this or let your own preferences and biases get in the way.
Think about your target tenant
As an investor you need to be very aware of your specific target market. Who are they? What do they want? How are they going to make this decision?
Students, young professionals, families, older adults - they’ll all have specific attributes they’re looking for in a property. If you’re looking at commercial property, then you need to think about the type of stores, businesses, brands and people you want to attract.
As an investment buyer it’s your job to get inside their heads and ensure that you find the place that can satisfy them. What’s more, you’ll need to think about how large your pool of potential tenants is and whether there is any risk of it drying up in future.
Having an in-depth understanding of your target market will ensure that you choose a property that’s not going to have a high risk of extended vacancy.
Screen your tenants extremely well
The right tenants can make all the difference when it comes to the profitability of your investment property. However, many new investors are so eager to get their first tenants in they fail to screen them properly.
You obviously want tenants who pay well and on time, but you also need to look for ones that will stay long, require less of your time, are easy to communicate with and are likely to add to the value of the property.
People often underestimate the time and effort that tenants require from the property manager or owner. And there are also risks to be considered depending on the type of investment property you buy.
As an owner of apartment buildings or rental houses, you might find yourself dealing with everything from leaky pipes to tenants who operate meth labs or abscond overnight.
If you own retail or office buildings, you might have to deal with a business that leased from you going bankrupt or facing criminal charges.
If you own industrial warehouses, you might find yourself facing environmental investigations for the actions of the tenants who used your property.
Real estate investments are not always easy to handle or manage on your own.
To minimise as much of the risk as possible, ensure that you have a rigorous screening process in place before you find people to rent your property.
While there are a number of risks and considerations involved, the potential benefits are enormous. Simply being aware of all the potential problems will ensure you’re able to future-proof your investment and make smarter investment choices.
With the right assistance and guidance, income property can make you a great deal of wealth and act as a solid investment.