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Investment properties: filtering the good from the bad

Mar 18, 2016 10:37:13 AM

Investment_property_criteria.jpgLeaving decision-making to your “gut feeling” can work in many realms of life, but when it comes to buying investment property, those with a proven strategy are more likely to succeed consistently.

If you are actively in the market for an investment property, you will be met with numerous “opportunities”, but only a few are likely to deliver the growth or return you are seeking.

Successful property investors filter opportunities through a set of predetermined criteria, dividing the suitable from the unsuitable.

While there is no foolproof system, investment property success stories are a product of research and careful consideration rather than chance.

Let’s start with the assumption that you are buying a new or near new property which requires little or no maintenance, and have researched and identified a region or town where you want to buy.

When looking at a specific property, what’s the type of criteria you may use to rule a property in or out of your consideration set? Here’s a quick summary:

Location, location, location. It’s the absolute non-negotiable of buying real estate. Location can refer to what is close by in a positive sense, for example waterfront, shopping and public transport. Location can also refer to what is close by in a negative sense. For example, if the property is on a busy highway, close to an industrial area, or an airport (such as in the classic movie The Castle), then the possibility of capital gain and/or strong yield reduces significantly.

Design. When assessing the design of a potential investment property favour functionality and practicality first and foremost. What are the important factors in home design that will encourage long term tenants? Some finishes wear more quickly than others, which will increase maintenance costs. For example, carpeted floors wear more quickly than tiled floors.

Value for money. Relying on capital growth alone to increase the value of an investment property can be hit and miss. It’s obvious, but the sure-fire method to make money on investment property is to buy under market value.

Trusting the developer. Particularly with property being sold off-the-plan, the reputation of the developer becomes an important consideration. Before buying, you need to do all in your power to perform a background check on the developer to ensure they are not only reputable, but financially secure. The last think you want is to invest in a property off-the-plan that is subsequently abandoned or postponed.

Rent-ability. Consider the typical person who is likely to seek a rental property in your property’s location. Whether you are buying in a suburb known for its families, its working class, its prestige, or a high number of students, you should seek the type of property that matches the needs of a likely tenant.

Suitability. Considering the likely yield of the property (annual rental income (weekly rental x 52) / property value x 100, is it suitable for rental. If the property will not return a yield above 4%, than it may not be suitable.

Marketability. Ideally, your investment property should remain attractive to the market no matter what the economy is doing. For example, a property in the top 5% price bracket may struggle to attract tenants if the economy slows. Favour properties that will be tenanted no matter what the economy is doing.

Market timing. At any one time in Australia, there will be individual markets going up, going down, and going nowhere. By investing counter-cyclically, for example, buying when others are selling is more likely to lead to a value-for-money deal.

Appeal. In a crowded market place, look for a property that has an X-Factor – something that will set it apart from other similar properties in the same area. This could be anything – from a stylish Balinese hut in the backyard, a fireplace or easy access to a local park.

Some of these factors are easily discovered. Others take serious investigation and due diligence, but the time you take to establish a thorough understanding of the property to inform your decision making will be well worth it.

Topics: Australia, Investment Property