You probably have a shortlist of things you are looking for in your investment property search, but no matter what type of investment property you are looking for or what the purpose of your purchase is, there are three fundamental things you need to look out for:
1. Rental yield
2. Potential for capital growth
3. Strong underlying demand
For a cash flow investment strategy, rental yield is especially important. You want to make sure you are making enough income from the property to see a return on investment (ROI).
For investors who are paying interest on a mortgage, the rental yield will help you estimate what the rental returns need to be in order to justify the property price, as interest rates and establishment fees can be costly.
Many investment properties will come with established tenets or have a known rental price, if not you can research the current rental prices for similar properties in the area to determine what is a competitive asking price.
If you ask too much, you risk having long vacancy times, if you ask too little, you are in danger of needing to dip into your savings to cover your property repayments and expenses.
In order to calculate a property's gross rental yield, divide the annual rent by the property value and multiply by 100. The gross rental yield of $570,000 property earning $480 a week in rent, or $24,960 a year, is 4.4%.
It stands to reason that the higher the yield, the better your profits will be. It is especially important for commercial property investments, but rental yield isn’t everything, and in some cases, it will be low down the priority list for an investor.
Capital growth is the profit you will make by holding onto the property for a long time, allowing your property to gain market value using nothing but time. The idea is that as time goes by, the land will become more valuable and the price of the property will shoot up.
There is proof of this everywhere; suburbs around Melbourne and Sydney that used to be ‘outskirts' are now inner-city hubs that everyone is busting their chops to get into and be part of. Or a region like Byron Bay, now with property skyrocketing after so many Hollywood A-listers have purchased there. These are the areas you wished you had invested money in 30 years ago, or even three years ago.
The one issue with capital growth is that there is no such thing as a crystal ball to forecast results. We really have no idea what is going to happen next (although that would be amazing, if we could buy with that certainty). What we need to do instead is look at the potential for future value. There are plenty of factors you can assess to get a gauge on this including location, the growth of neighbouring suburbs and infrastructure.
While high profits can be made with a quick turnaround in the right situations, in general, true capital gain takes a few decades to build.
While there are of course exceptions to every rule, the main thing to keep in mind is that capital growth takes time so you need to hold onto your property for at least ten years to really make a strong gain. Yes, there are expectations, like the example of Byron Bay.
Typically a residential property investment will see better capital growth than industrial or commercial type investments.
If there is strong demand for your property, you're more likely to get quality applications from tenants, get your asking price (and future adjustments) have low vacancy rates and keep your tenants long-term.
While the other factors to consider so far have been about financial stability, this one is all about pretty face, so yes, I’m giving you permission to make it all about appearance on this one.
Well-presented homes in desirable areas are more likely to have a strong underlying demand.
Look for things that will make a property appealing to tenants, like proximity to transport, shops, work and schools, and make sure the property features match. For example, if you are looking at the potential for a family with school kids taking up tenancy, do you have a yard, multiple bedrooms and multiple bathrooms? If you are looking at a property that would suit a business worker in the CBD, does it have modern amenities and creature comforts they would find appealing. Basically you are estimating what people are most likely to live in that area and what homes are they likely to need and coming up with a great match.
With high demand you can ask a great price and get a good number of applications so you can choose the tenant you want and trust that your vacancy numbers will be low.
It's important to analyse your property's appeal as well as factoring in the numbers as tenants are more likely to apply for, and stay long term in a well-presented property.
As you can probably see from the three criteria above, what you personally want in a property pretty much goes out the window. This isn’t about you, or the kind of property you’d prefer to live in. There is a huge range of different properties available, it’s a matter of finding the one that will make you money.
The place where you buy your investment property might not be your personal favourite suburb, instead you are looking for attractions. What would make someone want to live there? The bigger the attraction, the more people will be in need of accommodation and the higher your chances of securing a great long-term tenant.
At the same time, great attractions to a location can also help your capital grown if that attraction is here to stay.
Some examples might be
- Close proximity to offices
- Close proximity to shopping centres (this can also overlap with business/work if it’s a big complex like Westfield or Chadstone
- Top schools
- Walking distance to scenic sites, like waterfronts
- Exercise tracks, parks or walking trails
- Close proximity to Universities
While you can alter just about everything there is once you own a property (body corporate regulations aside) the one thing you can never change is the property location, so be sure to get it right!
Neighbouring suburbs offer a lot of perks, and can help open you up to a bigger market if the price is slightly lower. Usually investors can bank on a neighbouring suburb becoming the next big thing, and while there are no guarantees, it certainly doesn’t hurt to take a look around and see if something there is your perfect match.
There is no way around it, if you are investing in something as big as property, you’ll need to research every angle. Once you have your budget sorted, scout out the best suburbs in your budget range and take an extended tour.
As well as researching the latest property sales and community demographics on paper, be sure to go in person if possible to get a sense of the community by visiting cafes, shops, and recreation areas.
You can also boost demand by locating nearby features like parks, walking paths to beaches, and bushland. It would also be desirable to have views of the water or the city.
You can try to get ahead of the pack by investigating upcoming government infrastructure projects, such as freeway links and new shopping complexes. Don’t be put off by how long a build takes to complete, project workers will be looking for somewhere to stay while on contract, with long term tenants coming in after that.
When it comes to research local Real Estate offices are a wealth of information for what is currently selling where. Ask them for advice on what they are selling and what trends they are noticing in the community.
Apartments and units are typically more affordable than houses and provide higher rental yields. They can be harder to find in some suburbs but readily available in others, depending on the demographics.
Just keep in mind that body corporate fees usually apply, and depending on the building amenities (i.e. lift, pool, car parking) they can be really steep. Be sure to consider them in your budget as ongoing expenses. On the plus side, body corporate will take care of any issues outside your building walls, which can mean maintenance is lower and there is less for you to manage as the owner.
House prices are generally higher than units located in the same location. Even a large three-bedroom unit will usually have less land size than a house, and since land size is the main defining factor for property prices, it makes sense. As well as higher asking prices you’ll be completely responsible for maintenance costs and insurance.
When considering a house as your investment property, be prepared for a much higher budget for all your costs, starting with the initial purchase.
On the plus side, in the past houses in booming areas have had a higher capital growth rate than units and townhouses nearby, which may make up for the lower rental yield compared to units.
The choice to buy an established or build can be a tough one. It really comes down to location and your budget for what you can achieve. While every property will be unique, here is a general list of pros and cons to consider.
- Greater potential for capital growth due to land ownership
- broader scope for negotiating purchase price and terms of sale
- options to renovate or develop
- Lower rental yields
- May require extensive renovation or remodelling to be appealing to renters
- Higher maintenance costs
- Off-the-plan properties offer greater depreciation benefits
- Potential savings on stamp duty
- Maintenance costs are generally lower, as you can expect nothing will need a touch up for years to come
- newer systems mean it’s more likely to be modern and appealing to renters. To back this up check what warranties are for various building works and appliances.
- You may not have access to affordable land in the locations you want
- House and land packages can be limited in choice and location
- Takes time to build before you see returns
Investing in property can be done in many ways, so decide which one is best for you.
In terms of financing property investments, mortgages are the most common choice. The loan products available vary in terms of terms and flexibility. There are many financial institutions that specialise in lending for property investments. Depending on your situation, they can assist you in choosing a loan.
The total cost of a property is divided into shares in fractional property investing. An investor who purchases a portion of a property is entitled to get a share of the rental income and capital gains.
Real estate investment trusts (REITs) and property development companies can also be used to invest in property through the share market. A REIT pools investor capital and invests it into real estate assets on your behalf, which you own in part along with a host of unknown others.
As a result of diversification, they can reduce the risk for the investor, with smaller outlays and little effort on your part. The flip side of this is that they make all the decisions at all times, making this very much a bystander, passive income type venture, as opposed to hands-on and in control do-it-yourself where you buy and maintain your own property.
Exchange-traded funds (ETFs) offer the ability to invest in real estate via the stock market, just like REITs. Capital from investors is pooled to invest in a variety of assets. EFTs investing in real estate typically invest across several REITs.
You might be able to use the equity from a self-managed super fund to invest in property.
When it comes to choosing your investment property you need to focus on the facts and figures, and the only way to do that is through some good old fashioned research (well...online, so not so old fashioned I guess) as well as in-person to know exactly what your future tenants will see as valuable so you can put your trust in your investment. While no one has a crystal ball for future events and property outcomes, you can take the guesswork out of choosing the right investment property for purchase by hunting through the available data to find some real gems.
Match your property assets to what the surroundings offer as enticements and you can make a heavenly match that is a win-win for all parties for years to come.
Developers are known for spending big money on property because they know what they want and how much value they can get from the right location.
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