Property investment strategies in Australia

Here’s how you can find an investment that ticks all the right boxes.

You’ll need to consider a range of factors when buying an investment property. Here are 10 tips to help you find a reliable investment.

Property considerations

1. Suburb

Location, location, location. There’s a good reason why this cliché is mentioned whenever anyone talks about buying property. You’ll need to consider how close a property is to features such as public transport, restaurants and cafes, schools, parks and other public amenities. Is it on a busy road or in an area prone to flooding? Is the suburb generally safe or does it have a crime problem? Does the street and the suburb as a whole have a nice ‘feel’? Asking yourself these questions can help you determine whether or not an area is likely to attract tenants.

You should see what plans the local council has for future infrastructure development and also consider how proactive the local council is.

What to look for in an investment - location

ALSO READ: How to find a good property investment location

2. Your strategy

The type of property you buy will be largely influenced by your property investment strategy. There are a number of different ways you can invest in property, including:

Renovations

Regardless of whether you intend to touch up the paint or are planning something much more complex, like adding an extension, the goal of purchasing an investment to renovate is the same every time. Namely to increase its value which can increase rent earned equity in the property. Investors can then refinance it to gain access to that extra equity.

Buy and hold

A buy and hold strategy means you'll want to look at your property as a long-term investment. You'll need to find tenants and carefully manage your cash flow for repairs and improvements. The goal for a buy and hold strategy is long-term capital gain.

Flip

A flip consists of buying a property and trying to immediately sell it for a profit. This can often be achieved through some quick renovations and improvements. This can be a risky strategy

Wraps

Wraps are also known as vendor finance or instalment sales contracts. The standard selling procedure for most property is that the buyer puts down a 10% deposit and the difference has to be covered in approximately 60 days. After 60 days, the buyer's solicitor will have had sufficient time to complete the conveyancing process and financing will have been approved, all leading to the point when the buyer settles the purchase. At this time, the property title will pass on to the buyer.

Property trusts

When a group of people purchase a large property, or a portfolio of properties, they purchase the property in the name of a trust. The trust is responsible for the ownership of the property and the trustees all have a stake in the investment depending on how much money they’ve invested into the trust.

Property investors can get involved in two different types of property trust in Australia: listed and unlisted property trusts. The main difference between the two is whether the trust is listed as a public company on the Australian Securities Exchange (ASX) or not.

Listed property trusts are known as REITs, an acronym for ‘Real Estate Investment Trusts'.

Holiday home

There are some things you have to consider when buying a holiday house as an investment. Firstly, tax rules on holiday properties can be somewhat complicated in terms of renting them out and selling them, especially if you intend to use the property some of the time and will be renting it out the rest of the time. Thus, it is imperative that you know exactly what you can expect in terms of taxes so you can determine whether or not it's a good idea to invest and to have a strategy in place if you choose to do so. Your best option is to talk to your accountant or a tax expert to find out all the details before you make a purchase.

Defence housing

Defence Housing is a unique leasing arrangement structure. Defence Housing Australia is a branch of the Defence Housing Authority that has one directive and that is to build homes for defence force personnel and sell these properties to investors using a leaseback scheme.

The terms of the scheme force the landlords to rent the properties to employees of the defence force for a certain timeframe, which can vary from three to twelve years. The DHA website states that they administer in excess of 18,000 housing units in Australia, which include various property types, including houses, apartments and townhouses. The DHA offers property management services, which would seem to be a good idea at first by acting as a bridge between tenants and landlords.

DHA housing offers low returns, with most featuring gross yields that do not exceed four per cent and in some cases as little as three per cent. To compound the problem, the DHA charges a 16.5% management fee that is calculated on the gross rental income, which is sky-high when one considers that mainstream property managers generally charge between six and eight per cent.

3. Capital growth potential

If you decide to invest in property, you need to do your numbers to see if the investment actually makes financial sense. You also have to make sure that the return your property generates is comparable to the return you would have made had you invested in another asset class, like shares.

Capital growth represents the increase in a property's value over a period of time and is why most people invest in property. The buy and hold strategy is more commonly sought out by the capital growth seekers.

The property market functions in cycles, with periods of growth, stagnation and decline, which have all been part of the Australian property market. Considering this, it's clear that investing in property should be done for the long-term, rather than expecting a quick return.

4. Rental return

Experts state that you should measure your returns from rental income to the returns other asset classes could offer you and to use said measure to determine whether investing in property is a good idea or not. Study the average rental price for similar properties in the area and ask yourself whether the rent you receive will be enough to cover property maintenance costs and still allow you to make a profit.

An important figure is the yield of a property, which you calculate by dividing the rent you receive over a year by the price you paid for the property, which is then multiplied by 100 to get a percentage. For example, if you purchased a property for $300,000 and are renting it out for $300 per week, which is $15,600 per annum, the gross yield would be 5.2% per annum. This figure can then be compared to the yield you would get from investing in shares, for example.

5. Potential for renovation

A crucial factor to keep in mind when looking at an investment property is how easily you’ll be able to add value in the years to come. The word “potential” is thrown around a lot by real estate agents, and it’s something you should take into account. If you can find a property that is serviceable and in decent condition, you may be able to rent it out for a few years and then undertake a renovation project to boost value down the track.

Renovating an investment property 2

6. Structural Integrity

Next, look at the build quality and reliability. Does it have solid foundations and sturdy “bones”? What materials were used in its construction? Is it pest-free? It can be easy to get sucked in by one feature of a property, such as a luxurious outdoor entertaining area or newly renovated kitchen, and then be blinded to faults that exist elsewhere. Major cracks in the foundation of a build should raise a red flag.

A building and pest inspection is useful for any investor, so make sure you use it to your advantage. From a pest infestation to the presence of asbestos, a pre-purchase inspection will help you avoid any major issues that could potentially be expensive. A reliable inspector will also look over every feature of the property, so the condition of sheds, fences and retaining walls can be taken into account.

Ongoing repairs and maintenance can be a costly and time-consuming hassle for many investment property owners, so doing your due diligence and closely examining the quality of a property before you buy can save you time, money and stress in the future.

7. Architectural features

You’ll need to consider the architectural features of a property on the outside and indoors. Ask yourself whether the house matches the dominant architectural style in the area; properties that don’t won’t rise in value as much as those that do, while properties that throw together a selection of architectural styles won’t perform as well as those with a consistent theme.

Consider the property’s floor plan and layout. Is it functional and does it flow smoothly from one room to the next? How does it contribute to the feel of the home? This is an important factor in the property selection process as it will play a big part in determining a home’s appeal to renters and future buyers.

Reasons to invest in property

Property investment advisor and CEO of Empower Wealth Ben Kinglsey shares his reasons for investing in property over other asset classes:

A) Property has historically been less volatile than equities. Volatility is very dangerous when you have a leveraged position (borrowed money) as part of your strategy. Imagine using $100,000 of your own money and borrowing $300,000 to buy an asset worth $400,000 and within a very short period of time, its value drops by 50% and you have now have a value base of $200,000, but you have borrowed $300,000. Historically, investment grade properties simply don’t do this, but history has shown several occasions where shares have.

B) This next point might be a bit controversial, but no other investment asset is so important to government revenue. All levels of government have a vested interest in the value of property going up. Federal governments receive capital gains revenues, state governments receive stamp duty revenues and local government receive rates revenues. And these revenues are significant amounts of money to all levels of government, money each level of government cannot do without, so in my view investing in residential property is almost a ‘government backed investment.’

C) Control and influence – property’s tangible asset value can be influenced through improvements and good management. Plus, you can’t usually buy small amounts of shares within property, so full ownership gives you greater control over the asset to maximise its returns. Shares don’t give you this control and influence unless you are a billionaire!

8. Aesthetics

First impressions always count. A property’s “street appeal” and general appearance are crucial in attracting renters. But you also need to be able to see past a property’s looks and discover the personality that lies underneath. The layout, outlook, special features and presence of natural light contribute to the “feel” of a home.

9. Price

Price is always an important consideration for any investor, so you’ll need to be certain you’re getting value for money before you hand over any cash. There’s usually a reason why some properties are so cheap, and there’s a chance they will still be cheap when you try to sell them on in the future. Study the market and price trends in your area to determine whether a property is overvalued, undervalued or priced just right. With a little bit of research, you’ll be able to find the perfect investment.

Our recent study identified Australia’s 20 most affordable suburbs based on mortgages.

10. Plumbing and electrics

Faulty drain systems and old pipes can create significant structural damage. Pipes are costly to fix and because tenants won’t see them, repairing them won’t add a significant amount value. You should also keep a close eye on the wiring system of the property. Fixing electrics can be expensive which can harm your profit.

Compare landlord insurance policies to protect your investment

Property investment home loans

Rates last updated December 10th, 2018
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.99%
3.99%
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80%
Get a discounted, low-fee investor loan from a convenient online lender. 20% deposit required.
3.89%
4.24%
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80%
Fix your rate and minimise repayments for 2 years with this interest-only investor mortgage.
3.99%
4.13%
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$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with no application fee.
3.84%
3.91%
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80%
Get instant online approval and flexible repayment options with this fixed rate mortgage for investing.
3.98%
5.01%
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$395 p.a.
90%
Fix the rate on your investment property for 2 years with this competitive home loan package.

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Listen below to our interview with property investment advisor Ben Kingsley about property investment

Skip ahead to [29:35] to listen to Ben.

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If you consider all the factors before making a decision, you’ll find a property that will help you achieve your investment objectives. As long as you carefully evaluate and inspect the features of the property by doing your research, you should benefit from your investment.

You are putting a lot of work into making sure this works, so make sure to schedule a few weeks so you can enjoy your new holiday house too.

As long as you find the right property, as with any investment property, a beach house can make a lot of sense from an investment viewpoint. Not only can you make a decent rental income but you can also have a place to take a holiday each year, and also a place to retire to if you are in it for the long haul. But it's imperative that you find the right property and the right area, so make sure to do your research.

Marc Terrano

Marc Terrano is a Lead Publisher at finder. He's been writing and publishing personal finance content for over five years and loves to help Australians get a better deal.

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