These four tips will help you find a good investment property . If you’re a first-time investor, it’s easy to become so focussed on how much it will cost to buy
a property, that you forget to do all the other due diligence that will help secure a profitable investment. So apart from not blowing your budget, what makes a good investment property?
1. Location Location Location
I know this tip gets wheeled out in every second article about real estate, but location really is the keystone to investing well. You’re far better off buying a sub-standard house in a great location than a schmick-looking house in a neighbourhood that features in lists of the top-10 suburbs for noise pollution or juvenile misdemeanours. I was told many years ago ‘look for the worst house on the best street’ and this rings true.
So what makes a top location? Basically you’re chasing the high demand suburbs, the ones where applicants will queue up for an hour to see a studio apartment smaller than your average sushi kiosk. In the past, being close to the city or at least close to good public transport access to the city was near the top of many renters’ lists, but Covid has been a game changer in allowing so many of us to work from home. Now, many tenants are more interested in being close to a good café, a leafy park or a riverside walking trail.
For family renters, living within the zone of well-regarded schools is sometimes a dealbreaker, while for older renters, proximity to health care facilities can be important.
Vacancy rates can help steer you in the right direction. As a general rule, the lower the vacancy rate, the more demand, the better the potential yield.
2. Growth potential
As much as you might complain about the runaway real estate market, you’d be pretty disappointed if the property you bought for $600,000 today was still only worth $600,000 five years down the track. It does happen, especially in some regional areas where demand is low and job opportunities are scarce. Using property research companies like BlueWealth can help point you in the right direction with their data they have available, you can be armed with the information to make a calculated decision.
So you need to look for a property with the potential for strong capital growth. Location is a big factor here, but you can also force value onto a property through renovation, extension or redevelopment. If you tart up a tired townhouse before you rent it out, not only can you increase the asking rent, you might also increase your equity. Another factor is up and coming infrastructure projects that will enhance the suburb’s liveability and accessibility, this is something we strongly advise clients to look into. The more equity you have in a property, the sooner you can buy a second property.
3. Property Scarcity
It doesn’t matter how big the pool is or how well-equipped the gym, If you buy an apartment in a high rise development with 200 almost identical apartments, you’ve got to compete with up to 200 other landlords for the tenant dollar. Target unique and boutique instead – unit blocks of four, six or eight dwellings, maybe with character features, or a freestanding house that doesn’t look like the cookie-cutter McMansion you’ll find in every second housing estate.
And when you’ve narrowed down your search, check with the local council to see what new developments and government projects are in the pipeline. Buying a cute cottage one block from the train station may not be such a great plan if it will soon be surrounded by a clutch of new high-rises or a smoke stack for a new motorway. Another factor to look at is lenders willing to lend in high rises (especially in Melbourne and Sydney) is coming with caveats such as LVR of 70%.
4. Matching a property to your investment goals
Rather than debate the merits of capital growth versus cashflow, ask yourself what you want to get out of property investment. If you’re heading towards retirement, a reliable rental yield could be more important than watching the value of your property gradually move north.
If you’re just starting out and you’re keen to build a whole portfolio of properties, then targeting capital growth will help to fast-track your goal.
Maybe you’re investing now with plans to move in down the track, which means the property will need to meet both your wish list and the wish list of potential tenants.
There’s no one-size-fits-all-approach, just a few rules of thumb that will help maximise your returns.
5. Pick the right mortgage
This is crucial, and we are not just saying this because we are finance brokers. Time and time again we see clients coming to us with loans incorrectly structured, which is costing them thousands per year unnecessarily. A typical example is a client with variable account with an offset. When we ask them why they are on a variable account, they state that they want an offset. Unbeknownst to them there are products out in the market place which allow you to have a fixed rate with a 100% offset account. This knowledge will save you over 10k per year in many cases.
6. Work out your strategy, long and short term, have a plan and stick to it
Goals and objectives work in the discipline of investing as well as life. Work out what you want from this investment, a simple response like money is not an answer. Long term growth with an exit in 10 years is a good start. Perhaps a strong rental return or for the property to be neutrally geared and paying itself off till you retire. So put in the plan to do execute your strategy, one way is to review your fixed costs annually. Are you on the right financial product? you would be surprised what swapping to the right product can do for your investment. If you save 4-5k per year, put this back into your investment loan and compound this cost across 10 years, we are talking about shaving 2 years off your loan (as an example).