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What to look for in an investment property

For most people, investing in property is about increasing wealth and obtaining a secure financial future. However, while many Australians become property investors, success isn’t guaranteed because there are many pitfalls that can curb your results along the way.

There are a number of factors that you should consider before you buy, which will help you decide whether or not the property is likely to increase in value and help you achieve your property goals.

The property price

According to The Australian Landlords Panel*, around half of all investment properties are valued between $250,000 and $500,000.

“Australian landlords tend to buy and rent to the middle market – a market which might increase if incomes become increasingly squeezed in the continuing post GFC era. Renting may thus become a matter of necessity rather than choice,” the report states.

This means that you shouldn’t just focus on whether you are buying at a good price: It is important to consider the affordability of the market you buy into, so your investment appeals to the largest possible pool of tenants.

Sticking within your chosen suburb’s median price bracket is a good starting place.

The rental income

Another important consideration when determining your property investing budget is the reliability of rental income. It helps to determine whether a potential property investment is located in an area with a steady supply of renters; near employment nodes such as universities, hospitals and other commercial precincts is a good place to start.

A central location that appeals to tenants can ensure a strong rental income and minimise your losses, if tenants unexpectedly vacate your property.

Your asking rent should also be reviewed annually, with a view to increasing the rent regularly. Take note of vacancy rates; below 3% is considered tight and below 2% is considered extremely competitive. Your property manager will guide you and can provide evidence of comparable asking rents, to prove that the market can support an increase. Keep in mind that the rent must be low enough to attract appropriate tenants, but also high enough to move your financial position forward.

The property

Your budget may dictate whether you can afford to invest in a house or an apartment. Either way, you should ensure that the property type suits the demographic of the area, and will continue to meet the needs of the local market for years to come.

Take notice of the age and condition of the property and its fixtures and fittings such as carpets, curtains and cabinetry, keeping in mind that you want a property that is ready to rent out as soon as possible. In saying that, choosing a property that isn’t in pristine condition may be a smart move, if you believe you can add value through future renovations. Otherwise, select a home that is fresh, clean and ready for tenants to occupy immediately.

The property must be attractive to both prospective tenants and owner occupiers so you’re not limited when it comes to selling. Features like a well-considered floor plan, appealing colours and a good view will positively influence demand, which in turn can influence its value.

The location

To ensure your property is as attractive as possible to renters, you must take into account factors like its proximity to the CBD, public transport, schools and other lifestyle amenities.

Also consider: what are the future plans for the area? How will they affect anyone living there? And what level of crime or natural disasters are occurring (or at risk of occurring), nearby?

Most importantly, you need to undertake enough research to become confident that the property is the type of home that people in that location are looking to rent. If it’s located near a university, for example, small, low-maintenance apartments are going to be more in-demand that family homes with large backyards.

The statistics

It’s vital that you are familiar with and understand the demographics and market performance of the area you choose to invest in as well. The Australian Bureau of Statistics can be a wealth of information, and local property managers can be a huge asset in this regard. They can help you analyse the performance history of other rentals in the area, including vacancy rates, current yields, rental growth and highest demand property types.

When deciding what to buy and where to invest, remember: a property that is highly desirable to tenants will have fewer vacancies, and is more likely to achieve strong capital growth – putting you well on your way to financial freedom.

* The Australian Landlords Panel 2012: Research to provide a detailed understanding of the Private Property Investor sector.

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