Purchasing an investment property is a challenging step for any budding investor. If you’re looking to start your real estate portfolio and tap into the rental game’s success, you need to find the right property to entice tenants with.
Well-informed property investors refuse to underestimate the importance of a good property investment strategy. Once this has been established and is in line with your budget, a solid starting point is set to encourage a better understanding of the property type, location, and market you wish to target. But where do you go from here to ensure a reliable investment opportunity?
From weighing up capital growth, rental yield, and cash flow, to researching the location and property condition, there are multiple factors contributing to which investment property you should purchase. Here are a few vital considerations to get you started:
Do Your Research
The research stages are the most crucial for choosing the right investment property for your needs. As a buyer, you must do your homework on the property, and comprehensively research its location and the demographics of that area. Have a clear understanding of your budget, ideally from speaking with an independent broker, before you start looking – and stick to it. Use this research to help narrow down the potential options of where you can purchase your desired property within your budget’s price range.
Rental Supply and Demand
What’s in demand? The investment property you purchase must meet the tenant demands for the area to pull a healthy rental yield. If your desired location has a strong family demographic and a demand for family rental homes, avoid apartments or smaller houses which won’t cater for them, unless these can satisfy unmet demand (from a lack of supply) from other key demographics in that area. However, there is a less long-term risk to satisfy the more dominant demographic segment in the area.
The local area’s supply and demand should be researched in the initial stages. This will give you a clear indication of who the rental market is (families, young professionals etc.) to attract the right tenants.
Other factors that can influence the rental supply and demand in a location is the property value, current and future infrastructure, local amenities and capital growth prospects. Properties near public transport, schools, colleges or training institutes and shopping centers tend to hold greater potential. Such amenities and planned infrastructure proves the community is growing and the location is more likely to be in demand for the long term, which is key to building a successful property portfolio.
Hot Tip: Look for the preferred pockets in your chosen area. Because the preferred pockets rise in price more rapidly, it’s better to grab these as early as possible to enjoy greater capital growth.
Likely Rental Returns vs. Capital Growth
Buying in up and coming areas is paramount if you want to generate long-term capital growth. Whilst you still need to consider the likely rental returns of the property, it’s important to look at its capital growth prospects too. This strategy makes financial sense if you’re planning to negatively gear a property as well.
Avoid buying a property in an area which is over-inflated price-wise. Such locations can be detrimental to the long-term capital growth of an investment property. Instead, buy a suitable property in an area at the bottom of a demand cycle to help maximize capital growth.
Hot Tip: Check that your investment has an appropriate allocation of land for the location it’s in. It’s actually the land which makes capital growth, not the building!
Check the Property’s Condition and Title
Before signing any contracts and committing to a purchase, invest in a surveyor’s report to check whether the building is structurally sound. These reports are designed to give a thorough inspection of the property to identify any potential problems or defects which may need to be factored into your number crunching. Once you own the property, these building inspections should be done once a year.
Buying a property that isn’t in peak condition is not always a bad thing either, because there is potential to improve its value through the right renovations. Surveying reports are still a smart investment to avoid any costly mistakes which could have been brought to your attention prior to purchasing. Make sure that you check the property title too, as this will shed light on any Strata Title issues and legalities to be aware of.
Hot Tip: If the surveyor’s report brings up any defects which require fixing, always engage with a qualified tradesperson to carry out the work. They must be licensed to perform the required job and have adequate insurance cover to protect you against poor workmanship.
Don’t Forget to Crunch Numbers
Check (and double-check) that all numbers make financial sense and stick to a budget that’s realistic for your expectations, and the location and property type. You must have a solid budgeting plan which will cover the mortgage and other related expenses, such as agency fees, rates, and maintenance.
While negative gearing does present some tax benefits to consider in your number crunching, you may also want your investment property – and the rest of your property portfolio – to be positively geared. Providing your rental costs cover all expenses, the property isn’t costing you anything. As the mortgage repayments decrease over time and the rental value increases, you’ll then have more money in your back pocket.
Reaping the financial rewards of property investment is an exciting process. But without knowing which property is right for the location you’re buying into, it can be a costly and challenging time. Avoid the common pitfalls of property investment by knowing exactly what will make your target market tick.
Speak to an Independent Expert
It pays to seek the best advice with property investment and it can end up costing you more without it. For independent guidance on securing the right loan, engage with a financial broker or mortgage broker. If you’re after rental and property management advice, speak with a property management company. To have someone represent you – and your best interests, engage with a buyer’s agent. These are licensed professional who act on your behalf and assist with searching for a property that fits your needs and budget. They’ll also negotiate for you to ensure you get the best deal.