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What to Look for in an Investment Property
Buying an investment property is part of the dream for many people, with good reason. When done properly, you can earn income while building wealth and achieving capital growth. Later in life, when you own the property outright, you’re earning passive income even in retirement. So, with all of these benefits, why isn’t everybody doing it?
Well, the fact is, it takes a strong financial strategy and some money or capital behind you. It’s not as easy as it sounds, and there are also plenty of risks involved. However, by making smart choices for your investment property you can set yourself up for a bright future.
Here are some of the most important things to look for in an investment property.
When purchasing a rental property, capital growth should always be a consideration. We should note there are several property investment strategies out there, and some may focus on more immediate income rather than long-term growth. However, for most investors it’s a long-term proposition. This means capital growth should be a major consideration.
In short, capital growth refers to the potential for your property to increase in value over time. In bare numbers, most houses appreciate in value over the time as long as the market remains strong, but not all capital growth is equal. Purchasing in developing areas at a good price is one of the safest ways to achieve capital growth.
High rental yield
The other major investment strategy focuses on generating a higher income straight away. To do this, you need to find a well-priced property that produces high rental income. However, just shooting for ‘high income’ doesn’t really tell the whole story.
When it comes to investment, it’s all relative to the purchase price and your monthly mortgage repayments. If you buy a cheap house, you don’t expect it to generate the high weekly rent that a more up-market home would. However, it should always generate a high yield in comparison to what the property costs you.
Homes in sought-after areas
Wherever possible, and assuming your budget allows it, the best place to purchase investment properties is in sought-after locations. Not only are the houses generally more modern, appealing and therefore should require fewer renovations, but you also have a great opportunity to generate good rental income.
People are prepared to pay more to live in popular areas. Whether it’s a wealthy suburb with luxurious homes or a central suburb close to restaurants and cafes, different locations have appeal for different reasons. Study the market carefully, looking at current rental prices and occupancy statistics, and make an informed decision on the location of your investment property.
Homes with extra features are instantly more appealing to renters. With that appeal comes the opportunity to collect a higher rental income. Not only that, but you can expect to have less issues with tenancy. Renters are likely to stay longer if the home meets their specific needs Also, when you do have a change in tenancy, you shouldn’t be left waiting long to replace your tenants if the home has a little something extra.
Things to consider are secure off-street parking, outdoor entertaining areas, extra bathrooms, garden sheds. Also make sure the home suits the area’s demographic. For example, if your home is more likely to attract older renters, several flights of stairs may not be appealing.
Structural integrity and building inspections
Most people wouldn’t buy a home without a building inspection, whether it be an investment or a permanent residence. However, it’s worth mentioning here because the consequences of not doing so are severe. Repairs and renovations in an investment property will seriously impact on your ability to generate income.
In some instances, you can even rule properties out with your own visual check. Cracks in the walls or ceiling can indicate movement in the foundations. The floor should also be checked - look for rot in timber floorboards and cracks in concrete.
These warning signs are obvious, but other issues may not be so easily visible. It’s expensive to have building inspections done on every property you view, but if you’re interested in progressing towards a contract, always ensure there is a ‘subject to building inspection’ clause.
Are there good schools nearby?
It’s incredible how much impact a good school can have on the local rental market. In cases where school district zoning is in place, young families and couples planning a family will gravitate to areas with good schools. This generally increases rental prices in the area, and the market becomes more competitive. As a property owner, this is exactly what you want.
In addition, good schools in the area are also an indication of what the location is like. Quality schools often means higher-income families in the area. This in turn can lead to more development, a better local economy, and ultimately a good chance for capital growth.
Properties that ensure your mortgage is manageable
One of the cardinal sins in property investment is overextending yourself financially. You want your property to earn income, not cost you money. If you’re taking a long-term approach, you might expect the rental income may not quite cover your mortgage, however it still needs to be manageable for your own circumstances.
If you’re paying another mortgage, bear in mind that your monthly repayments will increase markedly. Always ensure all of your costs can be covered by your rental income and other household income. It’s also important to remember that if you hold a variable rate mortgage and current rates are low, an increase in rates will mean higher repayments. If you’re paying off two properties at once, even a small rate increase can have a significant monthly impact. So, plan for future expenses as well as the current situation.
Options to subdivide
Finally, when purchasing property, you may like to consider the options for subdivision. Homes on a large parcel of land can be subdivided (subject to council approval), allowing you to build an additional residence and collect rent there too. You can also knock down an existing structure and build multiple smaller units. Many locations around the country actively encourage subdivision, so if this interests you, check out the local rules.
It can be a great way to generate wealth, and often reaps more instant rewards. For example, you could build 2 units and sell one while collecting rental income from the other. The sold property takes a big chunk out of your mortgage, which is why subdivision is such a popular strategy.
Whichever way you choose to approach your property investment, if you follow these guidelines and do your research, you’ll give yourself every chance of success.