It’s often said that property is one of our nation’s favourite pastimes and with property investment continuing to be one of the most popular ways to increase personal wealth among Australians, who can dispute that?
Investing in property certainly has its advantages. Firstly, you’re getting a physical asset and with that a degree of comfort that you wouldn’t normally have if you invested in shares or bonds. Secondly residential property investment has proved to be a lucrative long-term enterprise returning to Australian investors an average 9.8% p.a. over the last 20 years, according to the latest ASX/Russell Investments report.
If you’re a newbie to the property investment game, here’s my top five things you should be considering when investing in property:
HOW MUCH CAN YOU SPEND?
What may seem like a pretty simple question is actually you’re most significant. Before you even start considering your dream suburbs, you’ll need to work out how much you have available for a deposit either from what you’ve saved up or by using the equity in your current home.
The answer to this question will determine how much financing you’ll need as well as where you can think about investing. Ensure you give a bit of thought to all relevant costs such as stamp duty, conveyancing and insurance which can add up significantly.
It’s worth noting earlier this year that many lenders restricted the loan to value ratio on their investor loans to 80% or lower in response to ASIC’s concerns over investor lending growth, requiring property investors who could have previously borrowed up to 90% of the property’s value to have at least a 20% deposit on hand.
DOES THE PROPERTY HAVE CAPITAL GROWTH POTENTIAL?
The capital growth potential or the increase in value of the property over time should feature high on every investor’s buying checklist. I believe the main driver of capital growth is a desirable location which is generally determined by convenience to transport links and distance to amenities such as shopping centres, parks, universities etc.
When looking for an investment always try to narrow your search down to a maximum of 2-3 suburbs and then knuckle down a good location in each of these suburbs. From this, you can build up a good understanding of the property market for each location (i.e. how much did a house or apartment sell for last week and how does this compare to 6 months ago?) using data suburb tools such as realestate.com.au and CoreLogic RP Data and chatting with local real estate agents.
While a house contract will disclose any major developments, it may also be worth checking with the local council about any suburb wide developments and/or changes that could affect your purchase or the resale price of the property.
WHAT IS THE CONDITION OF THE PROPERTY?
Is the property in a good enough condition to rent out at the time of purchase? While you may be able to answer this question yourself with just a quick inspection, it may be a good idea to get a second opinion from a professional builder to ensure nothing is seriously amiss with the structure of the building.
If it’s an apartment you’re interested in, you could also have a read through the latest strata committee meeting minutes to dig up any other major problems with the building such as water damage, termites and asbestos.
Maybe, the property is liveable right now but is due for a renovation down the track. In this case, you should get a builder to cost what needs to be done and talk to a real estate agent to find out how much value a renovation could add to the property.
Tip: Ensure the increase in value from the renovation is considerably higher than the costs associated with renovating as well as the loss of rental income.
DOES IT HAVE A HIGH RENTAL YIELD?
The level of rental return you can expect from an investment property should be considered alongside its capital growth potential. Rental yield refers to the rental income as a percentage of the property’s value and is determined by a number of factors such as location and overall economic indicators (i.e. interest rates).
While the latest CoreLogic RP Data rental report revealed that rental growth is continuing to soften as weekly rents across capital cities declined by 0.1% in October, you can steer yourself clear of this slump by looking at areas that have a good vacancy rate. As a rule of thumb, any areas where the vacancy rate is under 3% indicate a reasonable level of demand from rent seekers.
If you’re planning to rent out your property you will also need to take out landlords insurance to protect yourself from any damage to the property or rental default.
WILL I GET FINANCE FROM THE BANK?
Too many inexperienced investors fall into the trap of buying a property in a less than ideal location simply because it’s cheap without weighing up the consequences. For instance, if the property is located near a bus depot or power station, you could find it very difficult to secure financing from a lender and will generally receive a lower LVR if you do.
On top of this the location may impact the renter appeal and resale value of the property should you wish to sell in the future.