November 01, 2017
When buying an investment property, there are many different factors you have to take into consideration.
Firstly, does the property/properties you are looking at boast strong capital growth potential? Can it/they generate a good rental income? What about tenant demand? Do you know if the property will easily attract desirable tenants?
These are all questions you need to consider before jumping in with both feet.
One of the first things you need to think about before you buy a particular investment property, is the amount of rent you believe the property can generate.
The selling agent should be able to give you a good indication as to how much the property can generate in rental income each month, so make sure you ask them about it.
The amount of rental income a property will generate will largely depend on the type of dwelling it is (apartment, house etc), the size of the home, its location and proximity to necessary amenities, such as schools, public transport and hospitals.
You should also investigate the potential rental yields for a property. If the dwelling was privately owned and never rented out, look at the average rental yield for the suburb. Rental yield is calculated thusly: [(rent x 52 / purchase price of property) x 100].
This is an important metric but should not be the determining factor behind a property purchase. Be mindful that there can be an inverse relationship between rental yield and capital growth where properties offering a high rental yield may not provide capital growth. Overtime, properties may increase in value, however, rents may not rise accordingly, restricting cash flow.
Vacancy rates are another metric that you should look at before buying an investment property. Think about this: where is your desired property located and what is the vacancy rate for that particular area? Again, your real estate agent or mortgage broker can help you source this information, so make sure you ask about it.
Knowing the vacancy rate for an area will give you an indication as to how desirable it is. In other words, the lower the vacancy rate for an area, the better off you will be.
A high vacancy rate indicates a larger number of vacant properties. As an investor, an area with a high vacancy rate may suggest it will be difficult to find suitable tenants. So long as you buy a good property that is clean, well located and situated in a suburb with a low vacancy rate, you will likely have your pick of tenants. This is what is commonly referred to as a Landlord’s Market.
Finally, to be a successful investor, you should always consider a property’s capital growth potential. Do your research, investigate the suburb you are looking to purchase in, and find out what the average capital growth rate has been for the past five and 10 years. Generally speaking, most properties will go up in value as long as you are prepared to keep them for a decent period of time.
As an investor, you must accept that property investment is a long-term commitment. Markets fluctuate, and while it may be ideal for the value of a property to rise each day you own it, there will be periods of stagnation or decline. Do not expect to see sensational capital growth within two years.
Your broker can give you a detailed suburb report that will show the capital growth for your desired area/s.
So long as you consider all of the abovementioned elements when buying an investment property, you should do well. When it comes to investing, it pays to partner with the right people, like a professional mortgage broker. Your local broker will be able to provide valuable market insights and offer sales data to assist you with your decision.