7 Key Points for Identifying a Good Investment Property
This week I aim to share with you some insider pointers and tips that we use to identify a good quality investment property. I speak to a lot of clients who say that they do their research but in fact they are barely skimming the surface and do not know what to look for.
1. Property Cycle
Where are we at in the property cycle for this particular area? Has the area just gone through a boom and we are at the peak of the market or is the market beginning its recovery phase? Buy low, sell high right?
This is critically important if you are looking for capital-growth in the short to medium term, certainly long term you’ll see a lift in prices but would you rather 1-2 years or 7-10 years wait?
2. Population & Demographics
Quite simply put is the population of the location increasing or decreasing as this will have a profound effect on the demand for property in the area. Likewise is the area a high net worth location, is it predominantly young families, singles etc.
One of the more interesting statistics I look for is the percentage of renters or tenants in the area, the national average being 25% rent, I’m looking for a location with a higher than average rental market.
I always tell my clients you want to buy an Investment Property close to Schools, Shops and Public Transportation, a Train station in Sydney is always preferred and to be within 10-15 minutes walking distance is a big bonus.
A very good indicator for me has always been follow the big guns, if Woolworths or Coles are setting up across the street then you know they’ve done their research (being multi-billion dollar companies) and the population is set to increase!
Avoid buying in an area that is centric to the one industry i.e. Mining or Tourism, if there is a shift in the market that affects that sector you could very well be left with a property in a Ghost Town!
CBD stands for Central Business District for a reason, there are multiple employment opportunities and if one sector has a tough time it won’t devastate your investment. Try not to be lured with grossly inflated rental returns!
5. Growth: Previous & Projected
Very similar to the first point about the Property Cycle it is important to understand how much prices have shifted in the area over the past few years, taking into consideration that a location may have already exhausted all of its growth in the current cycle.
Many of my clients come to me about locations I was recommending 12-18 months ago, unfortunately buying now carries a premium that can be as high as $100,000! Location, location, location should be location, timing and pricing.
Again, we touched briefly on rental before but it is so important that it warrants another mention!
An area must have a high demand for rental and check the vacancy rate.
Is the rental estimate a good guide or is it over-inflated? Look at the area from a tenant’s point of view!
7. Yield related to Growth
Imagine a See-Saw with one side rental yield and the other property value, now if the property value is high and the rental yield is low you will need to wait for rentals to increase before you will see any capital growth.
Let’s assume you have a property valued at $600,000 and you collect $600p/w rent that is dollar-per-thousand, now if the rental is lower at $400p/w why would you expect to see any capital-growth?
If you find a property that is valued at $400,000 and the rental is $400-$450p/w you have a better chance of the property prices increasing as the return is more appealing to more investors, more demand = higher pricing.
There are no guarantees in life and investing is no different but the better you understand your investment the better the chance of a positive outcome.
Personally I review every property I recommend as if I were recommending it to my own family, if I am not convinced it is not a good investment I’ll tell you.
Published on 20th of October 2014 by Marty Stanowich