What You Need to know when choosing an Investment Property
Choosing an investment property differs from buying for yourself because you have to look for qualities in a property that you can see others enjoying.
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Use your head, not your heart
When you’re choosing your own home, you need to find something that meets personal requirements such as proximity to work, kids’ schools or friends and family. As an investor you need to find a property that will suit a broad range of tenants. Of course you have the freedom to buy in any state or territory, though buying in a suburb near home gives you the benefit of local knowledge.
The key is to research locations carefully, looking at important factors like population growth, tenant demand, local price growth and any developments planned for the area. It is also critical to consider the type of property best suited to fulfilling your goals. Think about whether you prefer an existing or new dwelling, and the sort of features that you believe are desirable.
Some Must-have features
Regardless of the type of investment property you choose, there are certain features that appeal to most tenants, and these are worth looking for:
Security
Whether it is a safe, quiet street with good lighting or a home security system, tenants like to feel safe, just as landlords do.
Storage
Ample storage is a plus for tenants who may otherwise have to pay for off-site storage of personal belongings.
Parking
Off street or undercover parking will add value to your property and attract a greater range of tenants.
Low maintenance
Unless you are willing to pay for a gardener to maintain gardens, pools, spas and other features, stick to properties that can be easily and cheaply maintained.
A pleasant outlook
You’re likely to pay more for a property with views or a pleasant outlook but it will be easier to tenant and command a higher rent.
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Ask about Rental and Vacancy Rates
One of the biggest concerns in an investor’s mind is that their property may sit vacant on the rental market. This problem can be helped by selecting a home in an area with a high population rate and a low vacancy rate. Look at areas where the vacancy rate is below 3% because this is a sign of rental demand.
At the same time, find an area that has steady growth in value, especially if you choose a negative gearing option as you’ll need the growth in the long-term to offset the losses.
Before you enter into negotiations for a specific property, find out:
• Has it been rented before?
• How much rent was paid?
• Were any vacancy periods?
• How long it was vacant for, and why?
If you’re thinking about investing in property, get in touch so we can talk about your options.
An ideal location for an investment property is one offering good transport links, proximity to lifestyle features like shops, restaurants and parks, plus public amenities like schools and hospitals.
The vast majority of Australia’s population live within 80kms of the ocean. This gives coastal areas, in particular metropolitan centres, the weight of numbers. Properties do cost more here but as a landlord you will have a broader pool of tenants to draw on and greater potential for capital growth.
Outer suburbs and regional areas are more affordable and the rental yields are typically strong, but for rents and values to rise, an area must experience growing demand, and this relies on population growth. Check that any regional location you are considering is supported by a range of industries and business activities that provide a robust local economy.
Research…
When you’ve narrowed down the locations you’re interested in, research the state of the market in those areas. Keep an eye on vacancy rates, sales prices and rent returns as well as projected population growth.
Apartments
Can be more affordable and produce higher yields.
Easier to maintain though strata levies typically apply to cover the cost of maintenance and repairs to common areas.
Depreciation deductions can be greater for apartments as you may be able to claim a proportionate share of depreciation on commonly owned facilities such as lifts and security systems.
Houses
The land component of the property can enhance the potential for capital growth.
Houses generally cost more to maintain though they also offer greater scope to add value through renovations.
Houses are more likely to offer the ‘scarcity’ factor which can underpin long term capital gains and could mean fewer periods of vacancy.
Existing vs. new properties
Existing homes
You can see exactly what you are buying in terms of size, aspect, outlook, finish and the surrounding neighbourhood.
Established homes can show the result of years of wear and tear or worse, have significant defects. Be sure to arrange a professional pest and building inspection prior to purchase as this will highlight any defects or illegal building work that can be costly to repair.
Older homes will require more maintenance over time. This can impact your ongoing returns.
The property may have a known rent history or may even be sold with tenants in place.
Appliances or fixtures may be due for replacement or repairs.
Established homes can provide good opportunities to add value by renovating, subdivision, development or extensions.
The true market value of established homes can be determined based on more comparable sales.
New homes
Artist’s impressions can paint an overly flattering picture of what you are really buying. Visit mock-up units or display homes and study floor plans closely giving special attention to the dimensions of rooms and outdoor areas.
A new property is likely to be clean, fresh and modern – and hopefully defect-free. This can make the property more appealing to tenants.
A new home can offer greater depreciation benefits than an older property and repair and maintenance costs should be lower.
You may be able to charge a premium rent for an ‘as new’ property though until the property’s rent is tested in the market it is easier to over or underestimate the rent it will command.
Appliances are likely to be covered by manufacturers’ warranties and builders’ insurance.
There’s usually not much room to add value by renovating.
It is easier to over or underestimate the market value of new homes.
Long term leases
Commercial property leases usually run for longer periods than residential properties – several years rather than 6 to 12 months. This gives you greater certainty of rental income, plus rents tend to be reviewed annually. However, vacancy periods can be longer.
The impact of GST
Goods and services tax (GST) applies when you buy a commercial property, so allow an extra 10% on the property’s purchase price. As an investor, you can claim the GST back as an ‘input tax credit’ against GST charged on the property’s rent.
The lessee pays maintenance costs
Unlike residential property, the costs of maintenance, rates and repairs on a commercial property are paid by the lessee – not the landlord. This means more of the rent you receive goes towards your profit. However, be sure your commercial lease spells out who is responsible for the property’s ongoing expenses.
Some commercial properties serve a limited purpose
It can be harder to secure a lessee on a property that’s designed for a specific purpose. Opting for a property with multi-use appeal can help you attract a broader range of tenants.
Location is still key
As with any property investment, location plays a big role in the success of commercial property. Look for an area offering good transport links, a nearby pool of workers, and surrounding businesses that could offer support to lessees.
Could a commercial property deliver better rental returns?
Commercial property is usually regarded as a higher risk asset than residential property, and reflecting this, the rental return is usually higher. However, the decision between investing in residential or commercial property is a personal choice that will depend on the investor’s financial circumstances, goals and willingness to take on this higher risk investment.
Dodgy neighbours; flooding from a creek running behind the property; or just a change in an area’s demographic make-up can all be reasons why a property is on the market. Local shops are usually a great source of handy information. Take the time to go and chat. Inquire at the local council if there are any development applications in the area or environmental issues that could affect the property. Check local crime statistics too.
Never make an offer on a property until you have taken steps to determine its true market value, and how viable it is as a rental investment. Research recent sales values and current weekly rents in the area, and make inquiries about the tenant history of the property you are interested in.
If you are satisfied that everything stacks up, you can start your negotiations with an offer that is 10% below the asking price. However in a sluggish market it can be worth pitching your first offer at 15% below the listed price.
