How is Owning an investment property like having a business?
For some investors, the process of securing an asset might seem like the most challenging step in building wealth.
Hunting down an opportunity, negotiating terms with stakeholders, engaging professional advisors and ensuring contract completion and handover can seem exhausting. Once the keys are in hand and the adrenaline rush of purchasing is over, it feels like you can now sit back and relax while waiting for the wealth to build.
However, if you want to invest successfully, the hard work is, in fact, just beginning once your name is on the title.
Great investors know the truth – you haven’t just bought a property, you’ve bought a business, and like all successful entrepreneurial enterprises, it needs to be managed properly. If you take your hand off the wheel, your venture can veer toward financial peril.
Know your Numbers
So, how is owning an investment like running a business?
For a start, you need to set aside any emotion around the bricks and mortar, and think far more analytically.
That begins with knowing your numbers.
You’ve purchased this property for one primary purpose – to build wealth. You can only make smart decisions around that goal if you stay across your property’s Profit and Loss statement and its Balance sheet.
You should have some idea of your annual budget for a start.
This means not only keeping track of the income, but also of the rental market more generally in preparation for lease renewals. You want to make sure vacancies are kept low, but returns are strong.
This is where an excellent property manager can help. They’ll be well versed in what tenants are looking for in your suburb. They’ll also understand peak demand periods.
On the other side of the ledger is cost. Set out annual allowances for everything, from mortgage repayment and council charges, to expected repairs and maintenance.
Also – like a business, you must have a cash reserve on hand to help cover unexpected, expensive repairs – like a new hot water system – should the need arise.
You should also stay up to date with your asset’s value by following sales evidence and listings in your suburb. Measure this against your loan amount to see if equity growth will help finance you toward your next purchase.
Finance is Key
Every growing business needs finance and property investment is no exception.
Make sure you’re tracking not just your borrowing amounts, but the terms of your loan and current interest rates. You could perhaps boost your annual cash flow simply by seeking a better loan deal elsewhere.
One other excellent finance tip is to run a separate bank account for each property in your portfolio. It makes tracking income and expenses far easier, particularly around tax time.
Tax and Depreciation
Speaking of tax, one of the ways to increase your annual cash position is to take full advantage of available tax legislation. Unfortunately for everyday mum-and-dad investors, the rules around real estate taxation change, and it’s easy to be caught out.
If you don’t have a trusted property advisor or accountant, you might either miss opportunities to maximise your deductions or, worse still, make claims that are outside the tax code. Did you know, for example, legislation changed recently disallowing deductions for travel to inspect your interstate properties?
Talking of tax, depreciation is an often-overlooked source of deductions that investors consistently fail to take advantage of. Being active in your property ‘business’ means ensuring you have all the tools on hand – like a depreciation schedule – to keep your books in the black year after year.
Laws which govern property dealings and tenancies can be complex and unwieldy. State legislation, in particular, varies across borders. Your responsibilities for a tenant in one jurisdiction may not apply to another.
Like a business, you need to have a team member who can ensure all elements of your investment properties are in order. An excellent local property manager will know what things must be brought to your attention, or batted back to the tenant. They can also ensure your notification periods around lease terminations for renewals fall within the law too.
Legal compliance might also extend to other elements of legislation and town planning. For example, under town planning guidelines, can a tenant legally operate a home business from your property and can you charge additional rental for this use? If you don’t understand the legislation, you will not know the answer.
Every business need insurance – and landlord’s insurance is an absolute must in your property investment venture.
You have to protect your asset, and ensure it’s covered. This extends to public liability as well – an event that could bring your serious financial harm.
Like any good business owner, make sure your insurances are up to date and adequate.
Property investment – even for buy-and-hold investors – is never really set-and-forget. Smart owners know you must operate an efficient shop to bring in the most gains.
So, if you’re looking to buy, switch your mindset into business-owner mode and think hard about how you can make your operation a beacon of success.
Review your portfolio with a professional
If you are already an investor, being the end of the year and decade is the perfect time to review your property investment business.
Article by Richard Crabb – MD ASPIRE Property Advisor Network | PIPA Board Member