11 tips for what to look for in an investment property

Property management

Property investment is not a dice roll. You have to do your homework and find an investment property that will give a good rental return and increase in value over time. These 11 tips will help you find the right investment property.

One: Smart property investment

Smart property investment means doing your sums ahead of time and knowing what you can afford to buy. Aside from the purchase price, find out what the stamp duty, rates, insurance, bank fees and other costs are going to be. Add the costs and look into what you can deduct from your income taxes. You may find that your rent won’t cover all the costs. Can you afford to pay the difference?

Buying an investment property is a great way to get on the property ladder because tenants help pay the mortgage. Smart property investment means keeping a cool head and looking at properties as investments only. Look for a property that gives a decent rental return, but also look for a property that will increase in value over time. 20 tips for financing investment properties will help you get started.

property investors

Two: What to look for in an investment property

There’s a saying in the real estate world: “Location, Location, Location.” That sums up the first thing you should look for. The location of the property is an all-important first step. Tenants like to live close to amenities such as shopping centres, schools, public transportation and hospitals. It can even boil down to which side of the street you buy on or whether a property is on a busy road or a quieter road.

In general, houses or apartments on busy roads fetch lower rents than those on quieter roads, but there are exceptions to that rule in some areas. Read How to reduce the risk of vacancy for some tips on the types of properties to look for.

Three: Real estate investing: what’s in demand in the area?

You will be buying an investment property through a real estate agent. Try a few before you settle on one. Ask them every question in the book. Ask which areas get the best returns, but also ask what types of properties are in demand in the area. Who is looking for rental properties? It may be families or in some areas retirees are looking for rentals. Look for a property that is in demand in the area you want to buy in.

Four: Buying a house as a property investment

Real estate agents will show you a variety of properties. Some will be well maintained while others may need renovations. A “renovator’s dream” property may be a good investment because it will be priced lower than more well maintained properties.

There are risks involved in buying properties that need renovations, though. Cosmetic renovations such as painting will easily pay for themselves, but beware of properties that need structural renovations. Hire a building inspector before you purchase a property that needs renovations. They have the expertise to find hidden structural problems you may overlook.

The style of the house will also make a difference. In some areas, a particular style will be predominant. Try to find a house that fits the style of the neighbourhood. Avoid fibro houses and houses that look like they were built cheaply. A classic architectural style will increase in value. Cheaper houses may have only “knock down” value in the future.

buying new home as investment property

Five: Buying an apartment as an investment property

When you’re buying an apartment, you need to find out how happy the tenants in the apartment complex are. You may be able to ask a few tenants. Another thing you can do is find out who built the apartments and visit other apartment complexes they have built. Ask the tenants about the quality of the building; if it is well insulated; and if the body corporate carries out repairs quickly.

Don’t buy an apartment because it is less expensive than another nearby apartment complex. It may be less expensive because the owner neglects the building. Tenants may move out quickly and you may find it hard to find a tenant for a neglected apartment complex.

Six: Compare median prices

Median prices are just what they sound like: the middle or median price of houses or apartments in an area. The median price will differ, of course. For example, a three-bedroom house will cost more than a two-bedroom house, so find the median price for the type of house or apartment you are looking for.

This will give you a good indication of the true value of a property investment. A house or apartment that is in good condition may cost more than the median value. If renovations are needed, they may cost less.

Seven: Would you want to live in your investment property?

You have to be as objective as possible when purchasing an investment property. One way to be objective is to pretend you are going to live in the property. Do you like the layout of the rooms? Is the property light and airy feeling or dark and dingy?

Look for a logical flow to the rooms and imagine sleeping in the bedrooms or relaxing in the living room. Is the kitchen the right size? What about the bathrooms? If you think you could live comfortably in the house or apartment, tenants probably will, too.

investment property

Eight: Does the property have owner-occupier appeal?

You will be renting your investment property, but somewhere down the line you will want to sell it. If the property appeals to both investors and owner-occupiers, you will sell it faster and possibly fetch a higher selling price. Don’t limit the market to investors only. Think about owner-occupiers.

Nine: What type of tenant will your investment property attract?

Every property investor wants long term tenants who take care of the property; pay their rent on time; and are a pleasure to deal with. Those types of tenants are usually looking for a cheerful looking house or apartment that is in good condition. Tenants looking for bargains will tend to rent less well maintained properties.

This doesn’t rule out buying a house or apartment that needs renovations. You may need to roll up your sleeves and do some painting and cleaning. Even if you can’t do all the renovations you want to do immediately, a coat of paint, a tidy yard and perhaps new curtains will make any home or apartment look more cheerful.

new tenants moving into investment property

Ten: Juggling a property investment short list

If you’re serious about property investment, you will probably look at many properties first. That will be narrowed down to a short list of properties you’re interested in. Consider all the points listed above. What rental return can you expect from a property? Will the property increase in value over time? Is the property priced right? If a property needs renovations, how much will the renovations cost?

If a property that needs renovations appeals to you, be sure to have it inspected before you buy it. A property inspection costs money, but could potentially save you thousands or tens of thousands of dollars.

Eleven: Buying an investment property

The work is not done until you actually purchase an investment property. If you haven’t done so before, compare mortgage rates from different lenders. Do you want an interest only mortgage or can you afford to pay interest? Paying interest only can be a way to get into the property market, but there are risks involved.

Somewhere down the line you will want to pay some of the principle. Interest rates are low in Australia at the moment, but may go up.

Don’t forget you can claim expenses on tax returns. What can you claim back on an investment property at tax time covers many of the expenses you can claim.

Don’t forget an investment property is not usually a short term investment. Find the right balance between your lifestyle and the amount you invest. Don’t be burdened by excessive costs that make you sacrifice too many things you and your family enjoy doing.

If you’ve done the sums and found the right property, an investment property can enhance your lifestyle rather than detract from it.

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