When it comes to buying an investment property, there are a number of considerations that you should take into account. And whilst some of the rules that apply to purchasing your own home are still relevant, there’s a different set of criteria if the property is purely an investment.
We all know about the three key words: location, location and location. And most experts agree that position is one of the most important factors when choosing a property, for an investment or for yourself. Perhaps even more so from an investor’s perspective because it’s one of the key attributes that will drive capital growth over the long term – whereas when you buy a property for yourself there are emotional, lifestyle and family considerations that come into play.
Another point that is subject to debate is whether you should buy a property that you’d be happy to live in yourself. Think about differentiating between your own home and your investment to avoid becoming overly involved; remember it is the home of your tenant and not your own.
Location is the key consideration for an investment property particularly if you are looking to rent it out, and positively gear. You have to keep in mind who the target market is, what their lifestyles are like and what they will be looking for. If you are considering renting out to tertiary students, proximity to universities, colleges and TAFEs and easy access to public transport are a must. Whereas if you consider young families to be your ideal renters, then access to good local schools, parks and playgrounds are important factors. Retired couples will want to be within walking distance of local shops and close to hospitals.
- School zones
- Parks and recreation facilities
- Shops, cafes and restaurants
- Doctors surgeries and hospitals
- Public transport
- Access to main road arteries
The key strategy for buying an investment property is to find the right area and then the right properties within that area. And don’t only focus on past performance as that could often be misleading and not necessarily an indicator of future price growth.
An important consideration is the level of amenities and infrastructure in an area. If there is a new rail link, a new motorway planned or upgrade scheduled, it is going to help the property market because it creates economic activity and jobs along the way. Be aware that announcement stage isn’t always a guarantee, so be cautious and wait until contracts have been awarded and physical works happening.
There’s no such thing as too much research, so do your homework. Be flexible - if your chosen suburb is too expensive, look at neighbouring suburbs with a cheaper price point, a smaller property in your preferred area, or a place in need of renovation. House and land packages in outer suburbs can also be more affordable. Look for financial breaks in certain areas, like initiatives that remove stamp duty for homes under a certain value or, if you're eligible, a first home buyer’s grant.
Developing a successful portfolio of properties takes a lot of time and careful consideration. There’s very seldom a quick buck to be made, unless your extremely lucky of course, or you’re a skilled renovator and plan to flip a property quickly. Your main focus should be on buying safe, solid assets that will go up in value if you hold onto them for 10, 20, or 30 years.
- Set goals: Organise your finances and work out exactly how much money you have to work with and exactly what you want to achieve through your portfolio (capital growth or rental income).
- Do your research: You may have to look at 50 or more properties before you find the right one that ticks all the investment property boxes.
- Seek professional advice: The value of property experts should not be underestimated when investing in a property. These experts can save you a wealth of time and prevent a poor property investment.
- Look for properties within the median price range: You want properties that are going to be easy to rent because as a property investor, that’s what pays your mortgage. Look for properties that are within 10 per cent to 20 per cent of the median price for the area as that means 80 per cent of the population can afford to rent them.
- Choose the right property at the right price: Investing in real estate is all about capital growth, so choose a property that is more likely to increase in value. Buying at the right price is absolutely critical.
- If you’re renting out the property, get a good property manager: A property manager is usually a licensed real estate agent who is a professional in their field, and their job is to keep things in order for you and your tenant.
- Choose the right mortgage: Interest on an investment property loan is generally tax deductible. Structuring your loan correctly is critical and this should be done with the help of a trusted financial advisor. Most investment loans should be set up as Interest Only (rather than Principal and Interest) as this increases the tax effectiveness of your investment.
- Use the equity from another property: Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property.
- Check the age and condition of the property and facilities: Even with negative gearing, updating a property can result in over-capitalisation and can damage your cash flow. Engage a professional building inspector before you purchase to find any potential problems.
- Make the property attractive to renters: Update the property with neutral tones and keep the kitchen and bathroom in good condition so you attract a good quality tenant.
- Take a long-term view and manage your risks: Remember that property is a long-term investment and you should not rely on property prices rising straight away. The longer you can afford to commit to a property the better so you can build up equity.
Remember, you can always renovate or extend a home, but you can’t change its location. And keep in mind that it’s not quick and simple to sell a property if you urgently need funds. So be cautious. Most importantly, find the right balance between financial stability and still being able to enjoy life.