People invest in property to generate income, grow wealth and boost a portfolio. It can be rewarding and exciting if you evaluate the following factors before you buy.
1. Property Type
Do you want to buy an apartment, a unit, or a house? Do you want to invest in a city or a regional area? It all depends on your goals. For example, if you are interested in a property that will generate a good income over the long term, you may want to invest in a unit in an established suburb. Do your research and seek help from a professional who can help you make an informed decision. When you find a good property, make sure before you buy that you have other sources of income so that you can wait until you start generating cash.
2. Location
As the old mantra ‘location, location, location’ suggests, this is one of the most important factors to consider before purchasing any property. A good location means the property is considered to be in a safe area that has convenient access to public transport, schools, hospitals, shops, restaurants and other frequented places. You also need to be certain that your property is in an area where lenders are happy to let you borrow money to make a purchase. You can use our property location calculator to find out if a lender will let you borrow money to buy a property within a particular postcode.
3. Neighbourhood
Part of having a good location is being in a good neighbourhood. Prospective tenants should feel safe living in the property. A peaceful environment, low crime rates, close proximity to parks and ample green space are all characteristics of a good neighbourhood. Do the research. You can check the rate of crime and vandalism with local police. You can also visit the area and ask local residents if they like the neighbourhood.
4. Property Features
Take a proper tour of the property and see its features. Check whether it has enough space for parking. If it’s in a family-friendly suburb, does it have a backyard? If it has enough space to barbecue and organise a small party, that’s great. Check if the property has proper heating and insulation standards. Tenants are not going to live comfortably if rooms are always chilly. You should also check variables such as construction style, floor space, living room space, the number of bedrooms and bathrooms, and the kitchen layout. If there are specialised rooms such as an entertainment room, home office, workout and library space, the property can attract more tenants. Remember, certain features will attract more interested renters and command a higher rent. Some popular features include: swimming pools, garages, studies, en suites, beautiful views, dishwashers and air conditioning.
5. Additional Cost For Renovation
Check the age of the property. If it’s old, it might need a lot of repairs and upgrades. The maintenance can cost you a lot of time and money. Be sure to make a list of all the repairs and replacements that need to be done. You must be able to cover the cost of all of these and still remain within your budget or the property may not be a good investment for you. If you can afford the renovations, however, they may add good value to your investment. Always get the detailed report about the condition of your property from the building inspector or property manager.
6. Job Prospects
If there are good employment opportunities near the location of your property, demand will be higher.To find out how your area rates for job availability, you can check with the local council. You can also check Labour Market Insights. If you see that the top 10 industries are booming in your area, your property will offer good job prospects. If a mega construction project is taking place near your area, you can be sure that there will be a flock of workers in search of a place to live. This can be an opportunity for you.
7. Tax Information
Property taxes are different in different regions. The Australian Taxation Office says being tax-smart when investing in property means more than making the right property choices. If you are aware of which tax deductions you can claim and how much you’ll be paying in taxes, that makes you a tax-smart investor. You can talk to property owners in the community, the local government authority or a tax professional for all tax-related information. You should also be aware of upcoming tax changes in the near future; for example, Queensland’s changes to how it taxes investment properties out of state are already causing some investors to reconsider purchasing property there, even though the new laws don’t come into effect until next year.
8. Rental Yield
You need to calculate and compare rental yields before you purchase a property. It shows how much the property will earn in rent, relative to its value. This will give you an estimate of how profitable your property can be, relative to other income-generating properties. Investors typically calculate gross rental yield and net rental yield. Remember, for comparisons of rental yield to be meaningful, they must be between similar properties in similar areas. How to calculate your gross rental yield:
- Calculate your annual rental income. If it’s $500 per week, multiply it by 52
- Divide your annual rent by the value of your property
- Multiply it by 100 to get your gross rental yield as a percentage
For example, the gross rental yield for an investment property worth $600,000 with expected rental income of $600 a week would be: $600 * 52 weeks = $31,200 ($31,200 / $600,000) * 100 = 5.2% gross rental yield Now, to calculate the net rental yield:
- Calculate the total expenses to manage the property in a year
- Subtract the total expenses from the annual rent
- Divide that by the value of the property and multiply it by 100 to get the net rental yield in a percentage
Let’s assume the annual costs to manage the property are:
- Property tax: $200 per quarter = $800
- Strata fee: $300 per quarter = $1200
- Mortgage repayment: $750 per month = $9000
- Maintenance cost: $500 per year = 6000
- Insurance fee: $1000 per year = $1000
Total annual costs: $18,000 How to calculate net rental yield: The net rental yield for the above case would be: $31,200 (Income) – $18,000 (Expenses) = $13,200 ($13,200 / $600,000) * 100 = 2.20% net rental yield Again, whether a rental yield is good or not depends on what similar properties in the same location and condition are getting. For example, the rental yield for units is usually higher than that for houses. A very high rental yield (8-10%) means that the property is probably undervalued and provides you with better cashflow but may not have the best capital growth potential. However, a low rental yield (2-4%) could suggest that the property is overvalued and might not give you a big cashflow but may offer good capital growth.
9. Is The Place Prone To Any Natural Disasters?
According to the Australian Financial Review, up to 1.6 million homes nationwide are now at moderate or high risk from climate change-related extreme weather. And the numbers are set to increase by more than 60 per cent by 2050. Investors should always study whether an area is prone to any natural disasters, such as floods. As climate change makes such events more common, investors have begun to favour resilient buildings that can better withstand damage from storms, strong winds and flooding. They make informed decisions by using tools such as reports from Climate Valuation, which provide information on vulnerabilities.
10. Growth Potential
Good investors always forecast the change in the value of their property over the next few years. There are many indicators that suggest whether you are buying the right property at the right time.
- What is the trend of the median sale price for the suburb?
- If major construction projects are going on, such as upgrades to transport infrastructure, a new shopping centre, or a new hospital, it is a good growth area.
- If there are very few properties on the market but high demand for them, prices will probably rise.
- If sellers in the area are going to auction, it signals that there is strong competition, which lifts prices.
- A rising rental yield indicates that there is good demand for rental accommodation in the area.
If all these indicators are positive, it gives you a signal that your property will experience strong capital growth over time.
Things You Should Do Before Purchasing An Investment Property
- Do a thorough property research
- Decide on your investment goal
- Save enough for a deposit
- Make sure you are aware of any relevant recent policy changes
- Compare the income you expect with your outgoing expenses
- Get expert help: talk to local real-estate agents, and tax and finance professionals
Mistakes You Should Avoid When Purchasing An Investment Property
- Not having clear investment goals
- Not looking at enough investment properties
- Not knowing the true performance of your investments
- Forgetting additional costs, such as stamp duty, conveyancing fees and legal fees
- Letting emotions get in the way
- Neglecting to start or continue
What If You Are Still Not Sure If You Have Found The Right Investment Property?
Home Loan Experts’ specialist mortgage brokers can help you find the perfect solution when it comes to investment properties. With our extensive experience working with investors and lenders, we can help you narrow down options based on your financial situation. We can also help you get pre-approval for an investment loan so that you don’t miss an opportunity due to a delay in finance. A reliable pre-approval can secure your home loan and the investment property you want. Speak to our award-winning mortgage brokers by calling 1300 889 743 or fill in our free assessment form and we can help you with your investment loan options today!