Tips for Choosing an Investment Property

We are spoiled for choice when it comes to residential investment property in this country. The problem is that not all locations and property types are going to deliver the financial and personal returns we seek.

If you’ve decided that investing in residential real estate is right for you the next step is to determine where and what type of property to buy.

With thousands of suburbs across Australia there’s no shortage of locations and regions to choose from.

And when it comes to property types there’s plenty to pick from including the ever popular standalone house, unit, semi-detached, terrace, town house, high-rise apartment and split purpose (commercial/residential) dwelling to name but a few.

So we are spoiled for choice when it comes to residential investment property in this country. The problem is that not all locations and property types are going to deliver the financial and personal returns we seek.

In fact many property investors are faced with what the American psychologist Barry Swartz coined the paradox of choice.

Swartz postulated that having more choices leads to greater anxiety levels because it becomes harder for us to select among a plethora of options all of which seem to deliver what we want and/or need.

So let’s try to take a little of the anxiety out of the equation when it comes to buying an investment property by identifying ways you can reduce your choices by eliminating properties that aren’t going to cut the mustard leaving you to focus on the few that are more suited to your needs.

Set minimum yield and growth requirements
Yield is the amount of income a property generates divided by its cost (calculated annually) and growth refers to how much the capital value of a property increases over time. Normally high growth properties will return low yields and vice-versa.

By setting yield and growth targets you can eliminate those properties that don’t meet your requirements.

Ensure rental affordability
Aligned to the above is assessing average rents in the suburb you’re considering so you can quickly work out whether you are likely to be able to charge the rents you need to make the investment viable. If you can’t charge what you want than you should move to other areas and/or property types.

Aim for tenant appeal
Certain areas attract certain types of renters who have particular accommodation and location needs. This can include proximity to things like schools, shops, transport and nightlife. You therefore need to match the property you’re looking at buying with the potential tenant to ensure there’s a good fit.

Check vacancy rates
When a property is vacant it’s costing you money and the bills (like mortgage payments) don’t stop rolling in just because you don’t have a tenant.

Aim for suburbs where the rate is equal to or less than 3% as at this level your tenants will be easier to find and are more likely to stick around. Anything above this level increases vacancy risk meaning those locations are probably best left alone.

For instance be wary of investing in high rise/high density areas as these are often associated with high vacancy rates and poor capital returns.

Stick to areas you know
Local knowledge about a suburb is worth its weight in gold as you are in a much better position to assess the reasonableness of property values and any assertions made by selling agents and vendors. By sticking to areas where your knowledge is strong you can greatly narrow the focus of your target suburbs.

Demographic drivers
When assessing where to buy you should also consider a broad range of social factors to help you determine if this is the right area for you.

These factors include things like average age and incomes, family make-up (e.g. families with children, couples and singles), income levels, employment rates, crime rates as well local council plans to invest in infrastructure and community services like parks, schools and recreational facilities.

What you can afford
Finally, it goes without saying that you should only buy what you can afford – this includes the purchase price and the ongoing holding costs assuming the property is negatively geared (i.e. where property costs exceed rental income).

By focusing on those suburbs and properties that are within your budget you will quickly narrow down your choice and this will greatly reduce your anxiety, especially since it will help ensure you haven’t bitten off more than you can chew.

If you want further investment advice, please call our office and speak with on of our agent.

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