There is debate around the best investment vehicle, is it property? Or shares?  In my 10 years in the financial services industry I have seen clients make good returns and create wealth from both investment products.  If you are thinking about buying an investment property there are some things I would suggest you get an understanding of before you take the leap into the investment property market.

For most property purchases you will need to borrow funds to invest.  When you are using this type of strategy the plan should be to use someone else's money to make more money than it costs you to borrow.

Repeat after me... Reduce the cost of the money!

This can result in the following:

Positively Geared = The income is more than the expenses.

Neutrally Geared = The Income equals the expenses.

Negatively Geared = The income is less than the expenses.

The first step is to check the income return you will get on the investment.  You can work out your annual rental amount then divide it by the capital value of the property.   This is called your gross (before any expenses and tax) income yield or return.

For example a $500,000 property achieving a $500 per week rental return would earn $26,000 per annum this would be a 5.2% income return.

The next step is to look at the expenses associated with the property, body corporate, rates, insurance, and property management expenses just to name a few.  Total these expenses and divide it into the annual rental amount (keep loan borrowing costs out of the equation at this stage).

As a general rule of thumb if these expenses as a percentage of rental return are higher than 40% then the property expenses are high.  I mostly see this happen where a property has been bought off the plan with body corporate fees being charged by the agent that sold and manages the property.

Finally from a numbers perspective look at the cash flow after tax is applied.  If you are negatively gearing or buy a new property, which has a high, level of depreciation (more on this later) then you should get a good taxation return from having the property.  Looking at the effect of tax on the property can provide you with your break-even point or cost of borrowing the money.  This tells you how much capital growth you need each year from the property in order to be making money.

Some suggestions for successfully creating a property portfolio:

• Research and get an understanding of what you are getting into before taking the leap of faith.   Read any contracts and get a good team of professionals around you, lawyer, accountant, estate agent, financial planner.

• When it comes to an investment keep emotions out of the decision making, just because you like the colour scheme, kitchen or garden doesn't mean a tenant will.  Buy for return and only if the numbers stack up!

• Do your numbers and if you are borrowing to invest know what your breakeven point and real cost of borrowing the money will be.

• Take action.  Once you have put your strategy together and done your numbers sometimes the hardest part is taking action.  If the numbers stack up and you have done the research move confidently forward into your new investment!

If you need assistance in exploring these further talk to a professional but most importantly start your journey to being free around your money and creating wealth with understanding.