Long-term growth or a quick profit? Your investment strategy will help determine where and what you buy
Real estate can definitely be a great investment but many people mistakenly believe you can make good money from buying just any property. That’s not always the case. As an investor you should never lose sight of the fact that the ideal is an easy-to-maintain and attractive property for which there will always be strong tenant demand – after all, an empty property generates no income. The key to successful property investing is to buy the right property in the right location at the right price.
Before you even start thinking about the location and property, you need to have a strategy. Ask yourself what you want to achieve from your investment. Are you comfortable with out-of-pocket expenses or do you want a property that pays you from day one? Are you interested in long-term capital growth or do you want to make a quick profit by renovating? Maybe the thought of subdividing or developing appeals to you. Having a plan will help you make the right decisions about location and type of property.
Your next step should be to look at possible locations. How much you can afford will, of course, play a role in that choice. If you have worked out that you can buy an investment property worth $500,000, then there’s no point looking at suburbs with a median house price of $1 million.
It’s important to buy a property in a location that will appeal to the bulk of the population. Look for properties that are walking distance to cafes, shops and transport. You also need to think about potential infrastructure plans – any upgrades could help drive up property prices.
When you are looking at locations, find out how many rental properties are in the area. If there are too many you’ll have a lot of competition, potentially limiting what you can earn from the property. Oversupply can definitely be a problem. It also pays to look at vacancy rates, which can be another good indicator of whether a property is a good investment.
You should also consider the finance potential of an area. Some locations will be deemed higher risk by the lender. “Location in itself can be acceptable or not acceptable to a particular lender regardless of the rest of the details of the loan,” says Melissa Urquhart, online marketing manager at State Custodians. “As a general rule, smaller regional locations with a population of less than 10,000 will rule out a large number of lenders. This is due to the fact that typically there are not sufficient comparable sales in the area to establish the value and this may also mean that it will be more difficult to sell quickly in the case of default,” she says.
“Lenders may also show caution in remote locations where there is a single employer or industry. As the area is relying on one source for their income, if this business or industry falls it can cause significant financial strain for those living there.”
If you’ve narrowed down a few potential locations then it is time to find the property. One decision you’ll need to make is whether to invest in a house or unit. Most people think a house will be best but McGrath says you should not consider apartments the poorer choice. “While houses have historically achieved better capital gains, the gap is closing and there is greater rental demand for apartments,” he says.
When choosing the type of property, think about who the tenants are likely to be. For example, young families would probably prefer a house with a backyard. But if you’re looking in an area that has young professionals or students, a unit may be a better option.
Old versus new will be another consideration. “A big drawcard for new properties is that they usually require less maintenance compared with older properties,” says Ben Kingsley, chairman of Property Investment Professionals of Australia (PIPA).
There are a few risks associated with new properties, including the fact that you will typically pay a premium and there is more likely to be oversupply. Buying an existing property is buying an asset that has been tested in the market as they have a proven resale history and thus a history of their capital growth performance. “Another advantage of older properties is that they allow for cosmetic renovations, which can improve the value. Any improvement can also be depreciated,” he says.
You might also consider the level of depreciation allowances available so that you can maximise the tax advantages. Newer properties generally yield bigger tax breaks.
“Buying for investment should be a less emotional decision than buying to live in but you should still let your intuition guide you – if it feels good, you’re probably on the right track,” says McGrath.
This article is from Money Magazine's special edition of the 2016 Real Estate Guide. To find out more, click here.
Maria, Money’s deputy editor, has been with the magazine since 2001 when she started as a writer/researcher. She writes on a variety of personal finance and investment topics and has contributed to magazines such as Australian House & Garden and Good Health.