Target your ideal investment property
Property is often expensive and it can take years of hard work, commitment and sacrifice to save a deposit. The biggest mistake new investors make is buying the wrong property. Over time, it can cost you hundreds of thousands in missed returns and seriously damage your wealth plans. Let’s consider the steps you must take to find the best investment property.
Maximise growth and income
Finding the right property isn’t always as easy as buying and then leasing. Ultimately, you want to maximise your on-cash return because this will help you get the most from every dollar that you worked hard to save. By optimising your return, you’ll be able to purchase your next asset sooner, accelerating your journey to wealth. Seriously consider property improvements. The right renovation may unlock instant capital growth and also assist your cash flow and rental yield.
Minimise vacancy
Your thorough suburb research will place you in a unique position to genuinely understand your exact investment needs and how the property fits the broader market. So, put your suburb demographic research to good use. Buy the type of property that will appeal to the ideal target tenant in the area, at a competitive price. This will minimise property vacancy and make the property appealing, upon sale, to future investors and home owners alike.
Target the right type of property
Should I buy a unit, house or something else? How many bedrooms will yield the best return and minimise risks and vacancy? These are questions you will answer during your suburb research. The best type of property may surprise you, so don’t assume to know the answer without this analysis. For example, units may outperform in some areas whereas houses may be better in others. Similarly, a three bedroom house may actually be better in some areas when compared to a four bedroom property, simply because families don’t traditionally want to live in the area.
Income security is paramount and can be improved by minimising property vacancy.
Buy the median
The median for both rent and property price is the best indicator as to what a traditional occupier in the area can afford. If priced correctly, the property will have features that are typical for the area and this will be attractive to potential tenants. Properties that are priced significantly higher and lower than the median may experience additional vacancy or have poorer tenant outcomes because the property is unappealing to the average person in the area. The most competition for tenants will be in the average part of the market. If a tenant chooses to move on, you should be able to source a new tenant quickly.
Give the tenant the features they need
Tenant comfortability is paramount. Happy tenants will typically stay longer, reducing property vacancy. Supplying all the mod-cons may be necessary in some areas. But it’s often going to result in higher costs in the longer term when fixtures inevitably require repair or replacement. Striking the right balance is therefore very important. Ultimately, you should target a property that has desirable features to the target market.
For example, a property with additional shed-space may be attractive in blue-collar areas, reducing tenant turnover because it’s difficult for the tenant to move and storage costs in many areas are very high. Before undertaking a renovation, such as this, you will need to thoroughly review the potential on-cash return you will achieve. Some existing features may be valuable but not supply an appropriate return if they were to be built by an investor.
Run your numbers on several properties
Allocate a generous amount of time to simulate the financial returns you may expect to receive from a number of quality potential properties. Be sure to use a quality calculator to assess your property acquisition. If you’re uncomfortable running the numbers yourself, seek professional advice. Ultimately, ensure that the property you select has outstanding investment fundamentals and is affordable.
Ensure the property meets the needs of your broader portfolio
It’s important to seek high-quality, investment grade properties at every opportunity. However, simply purchasing a great property isn’t enough. To build a high quality portfolio, you must consider the way you achieve your financial returns, via income or capital growth. In Australia, you may require growth assets to build equity and improve taxation outcomes whilst also accessing income assets to allow you to comfortably service debt and purchase additional holdings. Growth and income assets are often complimentary which means that the blend of assets that you hold in your overall portfolio is critical.
About the author: Brenton has more than ten years experience in the financial planning industry. His specific qualifications include financial planning, margin lending, SMSF (self managed super funds) and direct shares. He is also an experienced investor.
Last reviewed: 24 October 2022
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