How to Invest in Real Estate and Maximise Your Returns
Investing in property can be a great way to generate a profit and is often considered less risky than other investment opportunities. While there is a bit more of a waiting game when it comes to seeing the benefits of investing in property, there are still a range of short-term benefits of investing in property.
The biggest one is being able to earn periodic income through cash-flow positive properties. While most of the time this ends up going towards paying the mortgage, that rental income is still going in your ‘pocket’ at the end of the day.
But playing the waiting-game is often a key part of property investments, with a focus on the long-term growth of property and the return on the initial investment.
Before looking at ways to boost your returns, it’s important to understand what return on investment is and how it’s calculated. Return on investment is often used to compare the gain or loss from an investment relative to the costs involved in owning the property.
In simple terms, calculating your return on investment (ROI) comes down to calculating the annual rental income and subtracting the costs involved in owning the property (e.g. maintenance, fees, rates, etc.).
Then, divide your net income by your total investment cost (the purchase price of the property) to determine your ROI (usually, this is multiplied by 100 to get your ROI percentage rate). For more on ROI, including where it comes from and what is considered good ROI, check out our blog ‘What Is Good ROI In Property Investment and How To Get It?’
While investment reality is a less-volatile form of investment, not all investment journeys are going to generate equal wealth. There are always risks involved in investing, and real estate investing is no exception.
That’s why it’s important to maximise the return on investment. Here are a list of key factors to consider that can help you boost returns and elevate your abilities as an investor.
Look to invest in developing areas
Suburb and property selection is probably the most important part of investing. This may seem a bit obvious, but you’d be surprised how many first-time (and even the more experienced) investors get this wrong.
And while a lot of the risk involved in property investing comes down to this choice, there are a range of strategies and methods to minimise this risk and boost the return on your investment.
One such way to maximise your return potential is to invest in growth areas rather than investing in established locations. Property in established locations generally comes with a bigger price tag. Often these types of property will be out of reach for beginner investors, but it’s important to not spend years in the ‘deposit saving’ phase just to try and break into these locations. Instead, look for areas that are on the rise in value. This means you’ll be buying the property before the area has grown, benefiting from a cheaper purchase price and an increase in property value as the area develops.
You’ll be able to boost your return just by owning the property in this growth area. And that’s all before you’ve looked to develop or fix-up the house!
On that note, buying in a developing area may mean buying a low-cost property that may need a little work. Remember it’s the land that appreciates, not the building. So don’t let a home that needs some fixing-up deter you, especially when you’ve located it in a growth area.
Buying these types of houses and making the necessary modifications can force capital growth and boost the return on investment.
Take advantage of tax benefits
Property investing also offers a range of tax benefits that result in short-term gain and increase revenue. From capital gains tax exemptions, claiming interest on your mortgage, to negative gearing, taking advantage of these benefits is a great way to maximise the return on your investment.
Potential for commercial enterprises
A useful tip is to look to invest in areas where large corporations may consider establishing their place of business, or are already operating. Established large corporations in the area generate demand, as employees of these corporations will often look to find housing close by.
This means lowering periods of vacancy, which gives you more rental income. Demand exceeding supply means the value of property will also rise in the area, so having a home near these commercial enterprises can be a great way to increase revenue.
Proximity to amenities
Another great way to increase revenue is to invest in real estate that is in close proximity to amenities. Whether it be swimming pools, playgrounds, shopping complexes, or necessities such as hospitals or schools, buying property close to these facilities is a great way to generate higher rental income.
Looking at property that doesn’t have these amenities close by? Do the necessary research and find out what plans are in place to develop certain facilities in the area. This is a great way to get in early and invest in a suburb with potential for growth.
Connection through public transport
It’s also important to consider how well the property is connected by public transportation. Whether it be access to the CBD or the basic amenities mentioned above, investing in property that is close to public transport will only give you the opportunity to increase the value of the home for potential tenants, which means higher rental income to boost revenue.
In any initial research on a location, make sure you check out the properties proximity to bus stops and railway stations.
Factor 4 and 5 is really about knowing the targeted audience you hope to reach when renting out the property. Are you looking at buying a large home that could house a new family? A school or child-care centre will probably be high on the agenda for those potential tenants.
If you’re buying in a location not quite as central, then it’s important that the area is still relatively self-contained (i.e. shopping centres and hospitals close by). Saller townhouses or apartments are generally popular with a younger demographic, so it’s worth considering connectivity to public transport and entertainment venues (restaurants, cinemas, pubs, etc.).
And remember, these are just a few of the factors to consider when trying to boost ROI. There are actually around 30-35 data points, quantitative and qualitative, from a range of sources that should really be analysed when considering where to buy.
It’s also about understanding this raw data, understanding the trends, and the relative weightings of the factors. While there is no perfect formula or algorithm that will provide a quick and easy answer, there are certainly ways to increase your chance of success and boost the return on your investment.