what to look for in an investment property

What to Look for In an Investment Property

The number one goal of any prospective investor is to buy a great investment property – easier said than done right? Here are a few tips to help you narrow the search.


1. Decide on your financial requirements

When it comes to an investment property, there are 3 directions you can go in terms of the financial performance of the property.

Capital growth: This is where your property is aimed at generating wealth through equity of capital growth. While your wealth will grow on paper, and you will likely be able to borrow against it you won’t necessarily be able to cash in on this wealth unless you sell or withdraw your equity as a line of credit. Although these properties tend to generate more wealth over the long run, they are harder to hold onto at first and may cost you some money each week.

Cash flow: These properties are great for people who may have concerns around weekly cash flow and need the property to supplement their income. By having cash flow positive properties, it also places you in a better position to invest in more properties. The downsides are that these properties generally return less capital growth.

Balance: Many people like a balanced approach which allows them to tap into greater capital growth without sacrificing their weekly income and lifestyle to fund the property.

Once you know what your needs lie between cash flow and capital growth, it will be easier to spot the property which fits your needs.


2. Buy for strategic reasons, not gimmicks or emotions

There are a lot of sellers in this industry who know how to play on people’s emotions to make a sale. If you don’t have a clear understanding of point 1 then it’s easier to get drawn in by their tactics.

High on the list of tactics is drawing in emotional buyers through the way a property looks. New off the plan sellers are notorious for this, and for their large price mark-ups. The irony here is that the buyers often think they are getting the deal of a lifetime when they are offered free upgrades, grants, rebates, etc.

What they don’t realize is that these things are not really a genuine discount and have been priced into the offer. If you look at any of these shiny new properties and compare them to existing ones you will usually find they are selling for much more. Which begs the question, are they worth it?


3. Know the Market and Buy in an Excellent Location

To buy with your head (not your heart) your property should align with your values and must be the right investment choice.

This means you need to do the work and put in the research. As a rule of thumb, do not buy an investment property in an area you know little about to avoid bloated prices.

Become well-read and familiar with the location. You can gain useful insights from Domain and Realestate.com.au, and loosely gauge current property values, demographics, average rents, and suburb stats.

A good location is one that has good proximity to shops, schools, churches, etc. Ideally, a good location should offer a convenient commute to centers of work. Also, ensure you visit the property at least three times at different periods of a day.

What are the traffic and noise like? What kind of people are walking about on the streets? Does it seem like a safe and friendly neighborhood? What about the nearby residents? Do any of them look like they could potentially cause problems?

By having a safe, quiet and peaceful location you will encourage longer tenancy periods and fewer vacancies.

Additionally, be mindful of areas where major construction works are going on, this could be a turn off for some tenants in the short run.  However, if the construction will raise the property value, this could be good for your long term capital gains. What it comes down to is balancing the options you have.

Speaking to local agents and the council in the area can help understand more about where you are looking to buy. Alternatively, by enlisting a buyer’s agent, you can easily get all these insights and more without breaking a sweat.


4. Be Wary of Neglected Properties with Unsound Facilities

When it comes to making improvements, there is such a thing as a renovator’s delight and also a renovator’s nightmare – how do you know which category a property falls into?

Engaging the services of a professional buyer’s agent and a building inspector will help you assess the property for its true potential.

They will be able to tell you whether the property needs simple cost-effective cosmetic renovations, or whether the issues go deep with costly structural changes needed.

Although renovations offer opportunities to manufacture significant capital gains, you need to pick your battles and focus on what can get you the best returns.

For example, repairs are often tax deductible however complete replacements or new additions are not.

Furthermore, as a general rule, you should avoid strata-titled properties with run-down facilities and exteriors. There is very little you can do to influence improvements at the strata level and a derelict exterior will undermine any effort you make on the inside of the property.


5. Does Your Property Attract You?

While a property doesn’t have to score a perfect 10 in terms of looks, it needs to feel like a keeper.

For example, does it have a flexible light-filled floorplan that you can see yourself comfortably living in? If yes, then it sounds like it may be the one (even if it might not win any beauty contests yet).

When tenants look for a property, they often value the floorplan and light just as highly as looks and finishes. Moreover, a floorplan is what you are stuck with, most other things you can change if you want.

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