By Rich Harvey, CEO & Founder, propertybuyer.com.au
Property investment can be an exciting journey towards financial freedom. However, without careful planning and the right property choices, it can also lead to unforeseen challenges. The key to success lies in selecting assets with strong growth potential and consistent rental returns.
Simply jumping into the market without understanding the factors that drive property value is a recipe for risk. To empower you to make informed decisions, here are my top 20 key criteria to consider when searching for investment properties for sale:
They say location is the golden rule of real estate, and for investment properties, it holds even more weight. While "the best place to buy investment property" depends on various factors, understanding location and position is crucial.
Location: This refers to the suburb or broader area where the property sits. Strong locations often boast factors that attract residents and renters, leading to:
Position: This refers to the specific placement of the property within the chosen location. Consider factors like:
By carefully evaluating both location and position, you can increase your chances of finding an investment property with strong growth potential and consistent rental returns.
Never choose an investment purely based on price. Price should be treated as a measure of relativity to determine if a suburb and property have the potential for capital gains and strong rental returns.
This concept is evident in discussions around "bridesmaid" suburbs. These are areas adjacent to high-profile, in-demand locations. Bridesmaid suburbs often appear relatively affordable compared to their blue-chip neighbours, particularly if they have similar access to services and facilities. For example, an investment property in Brisbane located in bridesmaid suburbs can deliver excellent investment outcomes, as they have more potential for growth than the neighbouring suburb which has already seen price growth. The key is to identify areas that offer affordability without compromising on growth potential.
When selecting an investment property, a crucial metric to consider is the amount of rent it generates relative to its purchase price. This is known as rental yield, expressed as a percentage and calculated by dividing your annual rental income by the property's purchase cost.
For example, an investment property costs $500,000 to buy and can achieve $400 per week in rent (which equals $20,800 per year) has a rental yield of $20,800 ÷ $500,000 = 0.0416, or 4.16%.
While a higher rental yield translates to more immediate income, it often comes with a trade-off. A general rule of thumb suggests that properties with high rental yields may have lower potential for capital appreciation (increase in value) over time.
This highlights the importance of striking a balance between your current and future needs. If you require a high and steady income stream to cover your loan repayments, prioritising a property with a strong rental yield might be wise. However, this might mean sacrificing some potential for long-term capital gains.
Studying current and potential population growth highlights areas where demand for housing will continue to rise, thus driving property prices up. Analysing a suburb or region’s demographics reveals the best type of property to buy in that area. For example, purchasing a one-bedroom investor unit in a suburb dominated by families would be a poor decision.
When considering an investment property in Queensland, New South Wales or for investment property in Melbourne, look for regions with robust population growth and demographics that align with your property type. This strategic approach ensures that your investment aligns with market demands and maximises your potential for returns.
A suburb's vacancy rate is the percentage of rental properties that are currently vacant. A healthy market typically has a vacancy rate between 2% and 3%. Here's how it impacts your investment:
Days on Market (DOM) refers to the average time a property stays listed for sale before it finds a buyer. Here's what it signifies for an investment property:
Stock on Market (SOM) refers to the percentage of properties in a specific area that are currently listed for sale. It essentially reflects the current supply-and-demand dynamic:
Vendor Discounting measures the average difference between a seller's initial asking price and the final sale price of a property. This metric provides insight into negotiation leverage in a specific market:
Auction clearance rates measure the percentage of properties listed for auction that are successfully sold within a specific timeframe, often reported weekly. This metric is particularly valuable in markets where auctions are a common sales method, like Melbourne and Sydney.
Why It Matters: Clearance rates offer a real-time snapshot of buyer demand. High clearance rates (above 70%) indicate a strong seller's market with competitive bidding, potentially leading to higher property prices. Conversely, lower rates suggest a buyer's market where sellers might need to adjust their expectations.
Important Note: Clearance rates are just one data point. Consider them alongside other factors like your investment goals and the specific property you're interested in.
The owner-occupier ratio refers to the percentage of homeowners compared to renters in a specific suburb. Ideally, you want areas with a high owner-occupier ratio (above 70%).
Benefits for Investors:
Online search interest reflects the number of people searching for properties online compared to the total number of properties available in a suburb. Since real estate listing portals such as realestate.com.au and domain.com.au are a major source for property seekers, this ratio provides an immediate gauge of buyer demand.
High Search Activity: A high ratio suggests strong buyer interest in the area, potentially indicating a market with good rental prospects and future capital growth.
Properties with the potential to add value – through renovation, subdivision, extension, or redevelopment – often attract luxury and prestige real estate buyers. However, evaluating this potential requires expertise, as factors like renovation costs, zoning restrictions, and potential overcapitalization need careful consideration.
Recommendation: Consult with a qualified property professional who can assess the feasibility and potential returns of any value-adding project.
As an overall concept, rarity tends to equate to higher value. That said, uniqueness as a value-add in real estate is a tricky, qualitative-based concept. For example, you want to avoid cookie-cutter units or same-same house designs in an area, because buyers will have multiple identical options among listings from which to choose.
By the same measure, a property with highly bespoke design and finish in a house might only appeal to a limited group of buyers or renters.
The idea is to shoot for a home that offers functional and broadly attractive features such as a large land area or additional usable bedrooms/living areas that enhance it as a residence but are not commonly found in every home throughout a suburb.
Strong local economies are a key driver of property price growth, particularly in regional and non-metropolitan areas. Diverse economic activities and plentiful opportunities for residents to find stable employment create a compelling scenario for potential residents. This influx of new residents seeking jobs translates into a higher demand for housing, which ultimately benefits landlords in several ways.
Beyond economic factors, desirable lifestyle amenities play a significant role in attracting residents and boosting property value. Imagine this: stepping out your front door and being greeted by a vibrant hub of cafes and restaurants within walking distance. Factor in convenient public transport options for seamless commutes to the CBD, beaches, or nearby nature trails. Top it all off with lush parks, community pools, and sporting facilities, and you've got a recipe for a highly sought-after location.
Before diving headfirst into an investment property, it's crucial to understand zoning regulations and potential limitations. Here's what to consider:
By thoroughly checking zoning, town planning restrictions, and title types, you can avoid unexpected limitations and make informed investment decisions.
The age and condition of an investment property can significantly impact your finances. Here's how to weigh these factors:
The ideal scenario depends on your investment goals and risk tolerance. Are you prioritising a higher initial return with potentially more maintenance costs, or are you willing to pay more upfront for a property requiring less immediate work?
Regardless of the property's age, a thorough inspection by a qualified building inspector is crucial. This uncovers any hidden problems that could result in unexpected repair costs down the track.
The number of bedrooms isn't the sole indicator of a property's ability to accommodate a family. Imagine a four-bedroom house with a poorly designed layout that feels cramped and dysfunctional. This is a common scenario I encounter during inspections.
True livability hinges on function and flow. Consider these aspects:
By looking beyond just the number of bedrooms and prioritising a functional, well-designed layout, you can find an investment property that offers a comfortable and livable environment for potential tenants.
The materials used to construct a property can significantly influence your ongoing maintenance expenses. Here's why it's crucial to consider the practicalities, not just aesthetics:
While aesthetics are important, remember that this is an investment decision. Prioritising durable, low-maintenance construction materials can save you money over the long term and ensure the property remains in good condition for your tenants.
While high-end finishes might not be essential for a successful rental property, prioritising functionality and durability in appliances and materials is key. This translates to two key benefits:
When considering off-the-plan properties, be especially meticulous. Double-check the inclusions list to ensure the advertised features are actually included.
While navigating investment property criteria can be comprehensive, it's a crucial step towards achieving strong returns. To streamline the process and leverage expert knowledge, consider partnering with a buyers agency in Australia. Investing in a buyer's agent can save you time, reduce stress, and ultimately deliver an exceptional outcome for your property investment journey.
Navigating the complexities of rental yield, capital appreciation, and market dynamics can be daunting. This is where a qualified buyer's agent becomes an invaluable asset. Here's how they can help:
Partnering with a reputable buyer's agent can significantly increase your chances of success in the property market. Here are some resources to get you started, including a helpful reference on property selection criteria: At Propertybuyer we have dedicated buyers agents in Sydney, buyers agents in Eastern Suburbs Sydney, Brisbane, Adelaide, Gold Coast and buyers advocates in Melbourne. By partnering with Propertybuyer and a qualified buyer's agent in your target location, you can gain a competitive edge in the property market and make informed investment decisions.
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call us on 1300 655 615 today.