When you enter the investment property market, you’re going to hear the words, ‘this is a great deal’ – and you’re going to hear that a lot. The problem is, this will only be true for a very small percentage of cases. To avoid investing your time, money and energy in a nightmare packaged like a present, you will need to take charge of your own education.
Taking the responsibility to do your own research means you’ll develop the confidence to spot the properties with the most potential for profit. There are so many things to learn and consider when buying an investment property – and some factors are more obvious than others. In fact, many first-time investors get so excited about diving into the property market that they seem to forget why they’re doing it in the first place; to make a profit!
With over 20 years of hands-on experience in property investment and the real estate industry, we thought we’d help you out. Here are the 7 forgotten features of a profitable investment property.
1) It’s attractive to your ideal tenant
We all have an ideal tenant in mind; quiet, clean, reliable, hardworking and preferably not undertaking any illegal activities! To attract great tenants, it’s essential to consider the aesthetics, features and the neighbourhood of the property.
Look for neutral colours, logical layouts, well-maintained yards and properties that are generally in good condition. Properties that offer that little something extra, like a second bathroom, a pool, or a ground-level entry will be more appealing to a wider market. The neighbourhood in which you buy will usually determine the types of tenants you attract, as well as your risk of vacancy. Let’s face it; your ideal tenant doesn’t want to live in a hot spot for criminal activity.
Properties that appeal to a wider range of people, whether they be a young couple, a small family or retirees, are much more likely to be a profitable investment.
2) Great local amenities – now and in the future
If you’re looking at a family-sized home and there are no good schools in the area, then you need to back away quickly! Even if you don’t end up renting to a family with school-aged children, the lack of quality schools in the local area can significantly lower the value of your property when the time to sell inevitably comes.
Savvy investors will also consider what amenities are within walking distance, the quality of the local shopping centres, recreation facilities, and the accessibility of public transport – not only in terms of what’s currently there, but also in terms of what the local council has planned for the future.
3) The property type is in high demand in the area
Consider the sources of likely tenants in the area. For example, a nearby university would suggest a high demand for larger student share-houses. In this case, you’d need to consider the number of bedrooms in the property, and find out the average weekly rent for students in the area. How do these figures compare to your expected rental income?
While investing near a university might seem like a great way to ensure a high demand for your property, there are also some risks to weigh up. As students will dominate your pool of potential tenants, you may experience a high turnaround of tenants, as well as an increased possibility of sudden of vacancies.
4) The suburb has a healthy growth rate
Two suburbs with a similar median house price can be so different in terms of their risk factors and potential for growth. Therefore, it’s so important to look beyond prices and actually study the data.
These are some growth indicators to look out for:
- The population is growing
- The economy in the area is stable
- New local employment opportunities are becoming available
- More people are moving to the area
- The council has big infrastructure upgrades planned
If the local population is decreasing and there are fewer jobs each year, you’re looking at the wrong suburb for an investment property. Choose an area based on its potential growth and your financial goals.
And remember, just because you’d like to live in a particular area, it doesn’t mean that it’s a good area to invest in.
5) The numbers fit your financial goals
Do you have a clear idea of want to achieve financially? Whether it’s for immediate cashflow or for long-term wealth creation, the point of an investment property is to make money. However, many inexperienced property investors jump in without doing all the sums!
Savvy property investors will calculate all the expenses and profits before making any big decisions. The first step is to consider the average rental returns for the area, as well as the predicted capital growth over time. Next is the tricky part; adding up all the expenses that come with an investment property.
You’re probably quite aware of the bigger costs, but have you forgotten about all the little ones? They add up! Here are just a few of the smaller, frequently overlooked expenses that could prevent you from reaching financial goals if left unchecked:
- Council rates
- Water rates
- Strata fees
- Repairs and maintenance
- Property management fees
- Estimated vacancy costs, including lost rent and advertising
- Insurance (eg. Landlords’ insurance)
- Taxation (including GST and Capital Gains Tax)
If the numbers reveal that the property in question is unlikely to help you achieve your financial goals in your desired timeframe, without compromise – move on to the next one!
6) The property suits your investment strategy
Are you looking for immediate cashflow? Or do you want to take advantage of capital growth and the tax benefits that come with negative gearing? There are many different wealth generation strategies for a property investor to consider, including:
- Positive gearing for cash flow
- Negative gearing for capital growth
- Doing renovations to increase value
- Subdividing a property
- Doing larger developments
- A ‘buy and hold’
- Purchasing units
Is the property under consideration ideal for your investment strategy? If not, are you willing to use a more appropriate strategy?
7) It’s not going to break your heart
If you’re looking for an investment property and you happen to stumble upon your dream home – abort mission! Remind yourself that property investment is a money making strategy, so it’s important to keep your emotions in check when buying your first investment property. If you fall in love with the property and want to live there yourself, it would not be wise to use it as an investment – you’ll only end up getting hurt.
Find a property that you don’t have feelings for. This will ensure you can treat it in a purely business manner, and use calm logic to negotiate the best possible price. Despite all the intricacies and investment strategies, it all comes down to the price you pay for the property. The lower your purchase price is, the greater your odds are of earning a great profit from your investment.
A bargain for someone else is not necessarily a bargain for you!
Don’t take anyone else word for it; the key to making a profit in property is to be patient and do your own research. You’ll eventually become very good at working out what a property is worth and whether it’s suitable for your goals.
However, if you need some assistance to set up your investment portfolio, or advice on developing a strategy for success in your future property purchases, ABA Tax is here to help. With over 20 years of hands-on experience in property investment and the Real Estate industry, it’s safe to say ABA Tax are your Investment Property Specialists. The team is always available for a chat – even if you just need some advice. Get in touch today!