5 features to look for when buying an investment property.
- To maximise returns, go for the right property in the right location
- It's essential to research the market thoroughly to ensure you’re paying a reasonable price
- Learn how to use rental returns in your favour, look for low vacancy rates and long-term appeal
- Never underestimate the power of a low maintenance property
When Australians look for a long-term investment, many prefer to put their money towards a physical asset they can see and touch. Property may also offer both immediate and future gains through rental income and capital appreciation. But while property continues to be a favoured investment choice, success is never guaranteed.
Here are five factors to consider if you're seeking financial prosperity through property investment.
The right property in the right location
Unlike buying your own home, property investors must think purely with the head, not the heart, when choosing where and what to buy. The location and type of property you buy will directly affect your rental income and capital growth.
Get to know the neighbourhood before investing. Public transport and access to the CBD are hugely valuable. Also look for schools and lifestyle offerings such as parks and retail precincts.
While a freestanding house in the suburbs may attract family renters, well-located apartments will do well with young professionals or students. Freestanding properties, including smaller homes like townhouses or villa units, may have stronger growth potential than apartments, particularly those in high-volume buildings.
Knowing what to pay
It's essential to research the market thoroughly to ensure you pay a reasonable price and position yourself for healthy capital growth. One strategy is to identify 'hot suburbs' that have recently seen strong prices and look for neighbouring suburbs that might be next in line.
Rental income will also influence the asking price. Ask the agent to provide you with evidence (or an estimate) of a property's rental price, and check this against similar properties advertised in your chosen suburbs. In Victoria, the Real Estate Institute (REIV) provides quarterly snapshots of median rents charged according to suburb and the number of bedrooms.
Some investors negatively gear their property, accepting that their property will run at a loss and claiming those losses to possibly reduce their tax. These investors are relying heavily on capital growth for long-term wealth creation.
For investors looking for a positive income, the rental return needs to be high enough to offset costs. Apart from loan repayments, this can include agent’s fees, ongoing maintenance costs, council rates and landlord's insurance.
A good rule of thumb is to seek a yearly rent of 5% or less or your property’s purchase price. After costs, investors in metropolitan Melbourne can expect an average rental yield (annual rental income versus costs) of 2.9% for houses, or 3.7% for units, according to REIV data for December 2019 (before the challenges presented by COVID-19). In regional Victoria, average rental yields were above 4% for both houses and units.
Low vacancy rates and long-term appeal
The best investment properties offer landlords the opportunity to charge good rent while attracting reliable tenants. Again – the key is research. Suburbs with low vacancy rates indicate both a strong local economy and high demand.
To attract the best possible tenants, look for properties that are in great shape or can be easily improved with a coat of paint or garden upgrade. Remember, you’re in it for the longer term. Don’t get caught up in passing trends but look for properties that stand out on their own merits, with features such as sizeable bedrooms, ample storage space or off-street parking.
Also consider your pricing strategy carefully. Securing a happy long-term tenant and avoiding any long vacancy periods may be more profitable than charging the highest possible rent.
Look for low maintenance
Investigate your likely maintenance costs before you buy. Engage a building inspector if necessary because undertaking major repairs (like replacing the roof) can make a significant difference to your cash flow and profit. Keeping up with maintenance will be essential to attracting and retaining quality tenants, so look for a property that offers low maintenance costs.