Now that we’re coming out of covid lock down, interest rates are extremely low and the market is getting busy so many people are looking to dip their toes into buying an investment property. Searching for the right investment property can be a lengthy process. Not only do you need to think about your long-term wealth strategies, you also need to make sure the investment property you buy will help you achieve what you want. In this article, we share six things to help you understand what to look for in an investment property.
Research the market
I always say you can never have enough information. There are several property markets across Australia, each performing a little differently based on a number of factors. Once you have a few markets in mind, do your research to understand how these markets have performed in recent years. You’ll want to know about rental availability rates, vacancy rates and the types of rental properties available.
It’s also worth looking into what’s going on near by – are there any future developments (for example Amazon is coming to Melbourne’s west – this creates jobs, more jobs, more people, higher rental demand). On the other end of the scale, are there any large scale works that will affect the property (construction right near an investment deters prospective tenants and affects the rental price) so make sure you do your research well!
Calculate the cost
Before you get a mortgage, you need to understand the different expenses you’ll have throughout the time you hold the property. These expenses may include vacancy periods (the time in between tenants where you have to pay the full mortgage) insurance, council rates, water rates, property management fees and maintenance costs. Make sure you balance these costs with what you expect to return through capital growth and your rental yield.
Also, make sure you have a buffer. Even the best tenancy can go south – divorce, death, tenant issues! It can take months to terminate a tenancy gone wrong and during that time, you need to be able to pay the mortgage without undue financial stress!
Location location location
Once you’ve narrowed down the markets that you’re interested in, you’ll need to identify some specific locations of interest. Entering a good market is great but securing a property in a top location within a great market is even better. Make sure you weigh up the proximity of properties to schools, public transport, retail, dining options and open spaces. Also make sure you don’t get too close to some of these attractive features – directly across from a school for example can create traffic issues for tenants so try and stay at least a block back to avoid this type of issue!
Rental yield
Understanding the rental yield of properties is a critical part of your research. You can calculate the rental yield of a property by adding the income you expect from the property, dividing it by the sale price and then multiplying it by 100. If you’d like to get more detailed, you could speak to an industry professional to factor in your mortgage repayments, taxes and other expenses to calculate the true return.
Consider capital growth
You also need to consider capital growth. Not only is it a large part of helping you build further wealth through property investment but buying a property with good capital growth can help you down the track when you sell or use the equity in your current property to expand your portfolio. The time you plan to hold the property forms a part of this consideration so make sure you’ve planned out a minimum 5 years ahead with your financial advisor.
Levies, fees and taxes
Different areas have varying levies and taxes. You’ll need to understand what the rates and land taxes are for different area as this will impact on your rental yield. Owner’s Corp fees often catch out unwary investors – small apartments with a car park can have extremely high owner’s corp fees which take a large chunk out of your rent. Also note Owner’s Corp fees aren’t limited to apartments, there are estates with facilities that have these fees also so make sure you know what estate has what.
Finding an investment property can be daunting, but by using the tips above, you can make sure your search is a methodical one and that you’ve done all of your due diligence before buying. As always, feel free to get in touch with a local property manager – quality property managers always have time to chat to prospective investors – their opinion isn’t influenced by a potential sale and they’ll have the inside gossip on what streets to avoid in their area!
Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.