Buying an investment property is very different to buying your own home. Here’s how you can find an investment that ticks all the right boxes.
Buying your first investment property can be a daunting experience. Even if you’re convinced that property is the best place to start building a strong financial future, choosing the right home for your hard-earned dollars is always a tricky proposition.
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You’ll need to consider a range of factors when buying an investment property. Here are eight tips to help you find a reliable investment.
Barry buys an investment property
Having purchased a few homes for his family over the years, Barry is confident that he’ll have no trouble finding a great investment property. On his first weekend inspecting properties, Barry finds a home he thinks is perfect and puts an offer in straight away. His offer is successful and within a few weeks, Barry is ready to start hunting for tenants.
Unfortunately, Barry fails to take into account a couple of important factors. The first is that although the property itself has a host of great features for a young family, it’s located in an area which lacks a range of amenities important to families, including parks, shopping centres and nearby schools. As a result, he has to settle for tenants he isn’t completely comfortable with - not all of their references check out - and charge them rent at a lower rate than he had originally planned.
The second factor Barry has overlooked is the construction of a new housing estate just around the corner which has flooded the market and created an oversupply of similar properties. So when Barry evicts his troublesome tenants a couple of years later and decides to cut his losses and sell the investment property, the offers he receives value the property at the same price and in some cases lower than what he paid to purchase it two years ago. In the end, he sells the property for less than he bought it for.
Having learned his lesson, Barry is armed with a long checklist of factors to consider when shopping for his next investment property.
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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.
2. Capital growth
The main goal for most people when investing in property is to make a profit at a later date. Consider how long it will take for the property to appreciate in value and whether or not you will benefit from capital gains over time. You’ll need to look at the performance of other properties in the area and the strength of the housing market overall, as well as the features of the individual property. Not only do you need to consider how attractive the property will be to potential tenants, but also how sought-after it will be for owner-occupier home buyers in five or 10 years time.
3. Rental return
The second way to make money from your investment is to generate an income from the rent you receive. Consider how attractive a potential property will be to renters. Is it an ideal suburban home for a young family or an inner city rental for a 20-something professional? Is there potential for the rent to increase each year and boost your cash flow? 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.
4. 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.
5. 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.
6. 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.
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.
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.
9. 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.
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What to avoid when choosing an investment property
- Risky properties. Major banks will sometimes refuse to lend money or will restrict the loan-to-value ratio (LVR) for certain purchases. These can include student accommodation, serviced apartments, off-the-plan purchases and properties in mixed zoning areas. If the bank views the property as a risky investment, you should too.
- Overlooking capital growth potential. Some investors get sucked in by the high rental returns and tax benefits of a particular property and overlook the fact that it does not offer sufficient opportunities for capital growth. This is why it's particularly important to conduct extensive market research into the market factors and trends within the area.
- Failing to budget for all costs. Buying an investment property requires you to spend more than just the purchase price. There are ongoing maintenance, repair and other property management expenses to be taken care of, so don’t forget to factor those into your calculations. It’s always a good idea to have a buffer of funds as a contingency in case you experience a long period without tenants, for example.
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.