The 9 most common concerns for first-time investors and how to tackle them

June 5, 2024

In a rapidly evolving financial climate, many first-time investors might be questioning if the timing is right to buy – here’s how to tackle your concerns.

When you’re thinking of investing, the doubts can creep in quickly: Do I have enough for a deposit? Will I pick the right property? Can I actually afford this? How does insurance work on an investment property?

As part of our commitment to helping Australians make the smartest decisions in real estate, we’ve teamed up with top experts Carolyn Parrella, Insurance’s Head of Distribution at Terri Scheer and Bryce Holdaway, a partner at Empower Wealth Advisory, to identify and alleviate nine of the biggest concerns that plague first-time investors.

 

1. Do I have enough money?

Start by assessing your financial situation, how you plan on financing the investment and your appetite for risk.

“Typically, investment properties require a higher deposit than primary residences”, Empower Wealth Advisory’s Bryce Holdaway says.

If you’re planning on leveraging equity in your primary residence, you’ll likely only be able to borrow up to 80% of your home’s value, so understanding your borrowing power will help you set a realistic budget.

“If the property needs work before it can be rented out, you’ll also need to factor in these costs,” he adds.

Consult with a financial advisor or lender to explore all the options.

 

2. What if I pick the wrong investment?

Making the right investment choice for you comes down to understanding the market dynamics of the asset you’re interested in and evaluating its potential risks and returns.

“Most attention is placed on the dwelling and not enough on the land that it is built on,” says Bryce.

 

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“As a result, a lot of focus is on the tax benefits of buying new property rather than the importance of the future demand for the location and its future productive use.”

While freestanding, owner-occupier properties have the broadest appeal, Bryce says what really matters is the land value.

“Well-located land with low risk of oversupply is the number one ingredient for future capital growth.”

 

3. Is buying in the current climate too risky?

Everyone has a different capacity for risk, and it’s crucial to understand your own before you begin investing.

“Risk tolerance depends on various factors such as your financial situation, age, investment goals, and personal comfort with uncertainty,” explains Bryce.

“Some investments are riskier than others but they often provide the potential for higher returns. Assessing your risk tolerance will help you choose investments that align with your financial goals and risk profile.”

 

4. How does insurance work on an investment property?

Insurance on an investment property is different to the insurance you need if you live in the property. For an investment, you’ll be needing landlord insurance which protects you from a number of potential scenarios.

For as little as $1.50 a day with Terri Scheer, you’ll have peace of mind knowing no matter what type of investment you own, or the location it’s in, you’re covered against tenant-related risks including loss on rental income, and loss or damage by tenants to your building and contents.

Carolyn Parrella is Terri Scheer Insurance’s Head of Distribution and says if you’re investing, landlord’s insurance is a non-negotiable.

“Landlord insurance can provide cover and peace of mind no matter where you choose to buy your investment property, from loss of rent if your tenant defaults on the rent and is evicted from the property, or if they break their lease and leave owing rent.”

“You may also be covered if your tenant damages your property and it’s untenantable while it’s being repaired,” she adds.

 

5. What is the best investment strategy?

To understand which strategy is best, Bryce says you must first determine the type of investor you want to be.

Do you want to rent the property out, develop it or flip it? Do you want to buy an existing property or off-the-plan? Are you chasing capital growth or rental yield? Are you interested in a house, or an apartment?

“Landlord insurance might also protect you from loss if your tenant is injured on your property and you are liable for the injury – something that can be particularly relevant to landlords in a body corporate situation, where you may have legal liability cover in common areas, but not in your unit,” Carolyn says.

“I strongly recommend landlords compare policies to really understand what they are being covered for – all policies are not the same,” she adds.

 

6. What’s the deal with negative gearing?

Negative gearing involves borrowing money to invest in income-producing assets, such as real estate, which often generate short-term losses that can be offset by tax deductions.

In simple terms, if your property is negatively geared, it means there is a shortfall between what you’re receiving in rental income versus what your mortgage repayments are.

Why is this beneficial for investors? Because it reduces your taxable income and may therefore mean you pay less tax.

But negative gearing isn’t the only strategy. Depending on your financial situation and financial goals, there can also be benefits to having your investment property neutral or even positively geared.

 

7. Are off-the-plan properties solid investments?

Supply is the enemy of capital growth. Off-the-plan properties typically don’t have scarcity, so the general rule is they underperform because of the oversupply risk and the imbalance in the land-to-asset ratio.

While they may contribute less in terms of capital growth, in suburbs with low vacancy rates, they can still be solid investments when it comes to rental income.

“Off-the-plan properties that are boutique in nature (i.e. low density) have the potential to perform well over time,” Bryce says.

“But steer clear of medium and high density.”

 

8. I have no idea what I am doing

We’ll let you in a secret: nobody does the first time around; that’s what the experts are for.

A property investment advisor can crunch the numbers to determine the optimum purchase price based on your risk profile and personal and financial goals, while buyer’s agents can research the best locations and then select and negotiate to secure a suitable investment property aligned with your buying brief.

 

9. I’m waiting for the market to soften

Too often, those who want to act, don’t get.

Bryce says once you’ve got your budget and cash flows worked out, the most important thing is to actually bite the bullet and invest.

“Every year out of the market is an opportunity lost,” he says.

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