Our Three Rules
We don’t just make baseless advice and recommendations when assessing different properties. We make sure that we abide by our Three Rules to ensure that our clients will have the very best options fitted for their needs. To give you a better understanding of how we do it at OakEden, here are our Three Rules for Property Selection:
The 200,000+ Rule
This rule states that you should be looking to invest in an area that has a drawcard population of 200,000 or more. Historically, areas with these population numbers tend to be self-sustaining and self-generating economies. These areas present much lower risk investments that offer the opportunity for stable growth and rental returns both now and into the future.
Rule out areas with a population fewer than 200,000 people
The 4 Pillars Rule
This rule states that you should target areas that are supported by multiple employment sectors. Aim for areas that have a good spread of employment across multiple industry sectors, such as:
- Mining
- Agriculture
- Tourism
- Education
- Government (e.g., Health and Defense)
- Private enterprise
- NGOs
These pillars provide stability in real wage growth, choices of employment and transience in population, which are strong indicators of self-generating economies. The more of these industry sectors an area has, the more sound the property investment.
Self-generating economies have a good spread of employment across multiple industry sectors.
The $1 / $1,000 Rule
This rule states that you should receive a minimum of $1 in rent for every $1000 spent on your investment property. In other words, your base rent needs to keep pace with your property value in accordance with this rule over time.
This rule of thumb will ensure that your rental returns reflect the evolving value of your investment property within the market.
Remember, consistency and sustainability are the keys to establishing wealth creation. The size of your property portfolio will ultimately depend on the level of growth and consistency of rent each property within it achieves.
$1 of rent = $1000 of property value.
Avoiding Property Investment Pitfalls
While investing in your first property is undoubtedly an exciting time, it’s important to remember that the stakes are high. This is the property that will kick-start your investment journey and lay the groundwork for successful wealth creation.
The secret to wealth creation using leverage, is to control the largest amount possible for the smallest amount of out-of-pocket cash flow. This means that when your investment property appreciates in value, you gain value on what you control, not what you contribute.
To help you steer clear of property investment pitfalls, here are three key mistakes to avoid.
Three Property Investment Mistakes to Avoid
Mistake One: Old Vs. New
The first mistake to avoid is investing in an old home, rather than a new build. While you can claim limited depreciation on old homes, it’s only a fraction of what you can claim on new builds, plus you aren’t entitled to any building write off.
When buying a new home, you can claim depreciation on both the home and the assets in it, whereas with old homes you can only claim depreciation on assets that you install yourself.
To put this into perspective, if you invest in a new build worth $400,000 (rather than an old home), you can claim more than $8,500 in additional deductions each year.
Mistake Two: P&I Vs. IO loans
Very few investors have the capital to buy an investment property outright and rely on loans to finance their first acquisition. As an investor you shouldn’t be afraid to take out a loan, but you should be vigilant about which loan you choose, as this can make or break your wealth creation.
Many investors turn to principal and interest (P&I) loans, as they allow you to pay off principal on the property’s mortgage earlier in the game. P&I loans however, have one major drawback – they require more out of pocket payments. Interest only (IO) loans, on the other hand, cost less short term and free up more surplus cash flow for future investment properties.
Mistake Three: Investing Using Joint Names
With property prices on the rise, many investors consider pooling their capital to purchase a joint investment. While this may be tempting, some investors make the mistake of calculating depreciation and then splitting the deductions based on ownership percentages.
Successful investors use the depreciation of investment properties to offset your taxable income. If you invest using joint names and split the tax deductions between all parties, you will receive a smaller tax rebate, which means you will have to use more of your after-tax income to pay off your investment property.
For instance, if you have a gross income of $80,000 (wage plus rental earnings) and you claim $39,900 in deductions, your tax rebate would be around $6480. Whereas if you invest using joint names, and split your tax deductions in half, you are left with a rebate of $3240. You would therefore need to make up the difference ($3240) from your after-tax income.