What makes a profitable property purchase?

By Lauren Leisk, Yahoo7 Moneyhound Updated February 1, 2013, 8:00 am

Profiting from property is an easy game when you know what to look for.

Buying a house is a landmark occasion in most people’s lives, whether it’s a first flat or a family home.

There are numerous things to think about, from location to home décor to who your neighbours will be.

One of the most important factors to consider is the profitability of your property. So when you’re ready to step onto the property ladder, take your time and think long term.

Bad news for current home owners

More than 35 per cent of Australians who have bought homes since 2008 are now in the unfortunate position of owing more money on their mortgage than their properties are actually worth. The immediate future doesn’t look any brighter, with analysts predicting that homes may stay in negative equity for up to six years as property prices continue to slump.

Related: Cash back from your home. What is a home-equity loan?

Still want to buy a property?

The GFC has meant that many banks are tightening their lending requirements, with fewer mortgage approvals going through and for far smaller values. While the average house price has risen in Australia by approximately $50,000 in the last five years, negative equity has increased by almost 30 per cent.

Related: Think before you sign - The joint-property checklist

The way ahead

If you’re lucky enough to be buying a home, be sure to make just a few considered steps that can help you to make your purchase as profitable as possible.

  • Think about your location: This will be key to the future value of your house, so make sure you scout out up-and-coming neighbourhoods and check out schools in the area, crime rate and local facilities such as transport. Are there any upcoming developments that will lift the value of the area like a new train station or shopping mall?

  • Building permits and building developments: It’s important to find out whether there are restrictions on the house in terms of extensions and building lofts or basements. Find out from the local council if the home is heritage listed as this will impede any extensive modifications you might like to do, or if it's an apartment talk to the other tenants in the building who have renovated and find out how hard it was get approval from council and or strata.

  • More bedrooms mean more money: Always try to extend your budget to at least two bedrooms to offer more flexibility for future buyers. Small study areas or TV rooms that can be converted into children’s bedrooms are also an added bonus. Find out if it's possible to add an extra bathroom even if it's just a small room for a toilet, and if you might be able to provide additional off street parking with a car port. Any extra room you can provide will increase your property value, even converting the roof space into an insulated storage space.

  • Calculate the interest you'll be paying: The purchase price of a property is only the beginning, you'll be paying a lot more than that for your home in the long run depending on how much deposit you have, what interest rates are, and how long it takes you to pay off. It's wise to calculate how much interest you'll be paying over the life of the loan so that you know how much the property needs to increase in value over the same time, in order actually make a profit from your investment.

In the example below, a 15 year home loan of $350,000 will see you paying nearly $515,000 all up. So you're property has to have increased in value by more than $165,000 to fund the cost of the investment:

Related: Mortgage interest rate predictions for 2013

It’s easy to get swept up in the excitement of purchasing a property, and you can quickly fall in love with a sundrenched conservatory or a beautiful bathroom. Try to keep a logical view of each property, considering its long-term value and how it can best work for you.

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Related reading:
Beginner’s guide to an investment property
Which credit card is best? Five excellent tips to help you choose
How to reduce your bills and save thousands
6 ways to make extra cash

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