How to pick the right investment property?
There are some key words in this headline such as right, investment & property. And these words are the actual ones the investors need to focus on.
Whether you are an experienced investor or a newbie, the basics remain the same. Some people like to be guided whilst others are DIY enthusiasts. We are all different in terms of how we make decisions but when it comes to investing in the right property, there are certain rules of the game which will help everyone to make the right decision.
I am going to sum up few from my experience of selling investment properties all over Australia all these years.
Have a clear goal: You should know what to expect from the investment property. Don’t buy something which can be converted into a student accommodation, a holiday home, a principal place of residence, a renovator’s delight at the same time.
Learn the difference of a home and an investment: People try to kill multiple birds with one stone. It doesn’t always work. Home is for fulfilling emotional and basic needs whilst investment property is for profit making.
Less emotions and more business: You don’t need to have a degree in architecture, finance or civil engineering to differentiate things. Don’t fall for the beauty and aesthetics of the property as you are not going to live in your investment property. Stick to standard plans and designs to maximise the market appeal.
Don’t judge a location: It is often seen that people become very personal when they have to pick an investment location. Posh areas are not for investors, those are for lifestyle buyers. Right location will have growing young population, infrastructure investment increasing, new facilities such as shopping, child care, schools and public transport adding up.
Don’t define the distance: Investment property should cater to your tenant’s day to day needs, you don’t need to drive everyday to see it. People fall for this trap of buying something closer to home to keep an eye on the property and they miss the best locations.
Understand the types of property: Detached houses, townhouses and apartments are few categories people invest into. Always calculate the outgoings for any type of property. High density living works well if it is closer to amenities. Tenants need to have compelling reasons to live in a property. Holiday home is not an investment. It’s a lifestyle choice. Property with development potential is not for everyone as it involves checking zoning restrictions, cost to subdivide, cost to demolish and then selling it for profit.
New Vs Old: If you want to maximise tax deductions for depreciation on building and fitting & furnishings, then new property is the way to go. Old properties are usually bought for redevelopment or for renovations which is not for everyone. Some people believe that they should be buying properties which are 2-3 years old as those properties have undergone a price adjustment as per the market and they have bit of track record of rentals as well. Its not always true. Most of the appliances in a property lose their warranties in the first few years and you never know the reasons of someone selling it so quickly. You can get a bargain sometimes, but every investor has different scenario when it comes to number crunching.
The sweet spot of price: Would you buy one property for a million dollar or 2-3 for the same price? No one can stop you from doing what you want to do. Just remember that majority of the population can’t afford very high rent for your million-dollar property. Buying in a medium range will help you get a good rental yield and give room to the property to grow at the same time.
Get to know your client: The tenant is your client. You are going to buy a product which should fit into your client’s needs as you are the end beneficiary of this product cycle. Sticking to neutral décor and standard plans will maximise the turnout at open inspections. Knowing where the demand is for rental market will put you in the right direction. Check the vacancy rates of fancy and average locations to see how the market differs.
Cost/ benefit analysis: It is always advisable to do a cost / benefit analysis for any investment property option before making a decision whether you are buying a property with development potential, an established property or off the plan. It is like knowing the servicing cost and fuel economy of the car before buying it.
Weighing rental yield and capital growth: Capital growth can happen faster than rental growth. Typical example: Melbourne & Sydney housing market. If things happen too fast, they will slow down at certain point to correct themselves. Be clear about what you want. Lot of inner city apartments may offer good rental yield, but capital growth may not be high because of lack of demand from home buyers. Buyers command capital growth and renters command rental yield.
Searching growth drivers: Property market has always been and will be dependent on interest rates for loans, demand, supply, population growth, job growth, average household income, infrastructure investment from public & private sector and affordability.
Health check-up: Getting an established property checked for structural defects, pests, plumbing issues, contamination and unauthorised improvements is a no brainer and its worth spending that money for your own peace of mind. Even if you buy something off the plan, you can still engage a quality building inspection person to inspect every stage of construction.
Professional help is an option: Saving time and money now to make money in the future? Consider seeking help from a professional who has more experience in investment property market. Professional experience is overlooked most of the time to cut costs. But when you are buying something for over $400k for example, you don’t want to run with your blinkers on and repent later.