Searching for the right investment property can be a lengthy process. Not only do you need to think about your long-term wealth goals, but you need to make sure the investment property you buy will help you achieve these goals. In this article, we share six tips to help you understand what to look for in an investment property.
Research the market
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. I also recommend looking at the demographic statistics and getting to know the profile of the local residents.
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 will likely include property management fees, council rates, water rates and maintenance costs. Make sure you determine your investment strategy upfront (i.e., negative gearing, positive gearing or positive cashflow) and understand how these costs affect the outcome of the return on capital growth and your rental yield.
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. I’d go as far as driving / walking around the streets, staying in the local area for a weekend and getting to know the best streets in a suburb.
Rental yield
Understanding the rental yield of properties is a critical part of your research. You can calculate the gross rental yield of a property by adding the income you expect from the property, dividing it by the purchase price and then multiplying it by 100. For example, if you purchase a property for $1,150,000 and the weekly rental return is $1,000 per week ($52,000 p.a), the gross rental yield for this property is 4.52% ($52,000 divided by $1,150,000).
It’s important to also calculate the net rental yield which is the true return. The net rental yield includes deducting expenses such as mortgage repayments, taxes and other expenses from the total annual rent and then dividing the balance by the purchase price. The net rental yield will of course be a lower figure however you need to include this figure in your return on investment analysis.
Consider capital growth
You also need to consider capital growth. Not only is it a large part of helping you create wealth through property investment but buying a property with good capital growth return can help you down the track when you sell the property or decide use the equity in the property to expand your portfolio.
As a rule of thumb, consider areas that demonstrate a 10 year rolling average of 5-6% year on year capital growth.
Levies, Rates and taxes
Different areas have varying levies, rates and taxes. You’ll need to understand what the rates and land taxes are for different areas as well as the different strata levies per area and block, as this will impact your rental yield.
Finding a quality investment property can be daunting, if you start by considering the tips above as a key starting point, you can make sure your search for the right property is a methodical one.
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Remember, this article does not constitute financial or legal advice. Please consult your professional financial and legal advisors before making any decisions for yourself.
