There are many considerations when buying an investment property, which depend upon whether you are looking for a long-term investment or a future home. One of the most common mistakes investors make, especially if it’s their first time buying an investment property, is emotional buying. Put your personal preferences aside (unless you plan to live in the property at a future date), leave all emotions at the door, and instead look at the property from a future tenant’s point of view.
The three Ps
I always tell my clients to consider the three Ps when looking to buy an investment property –Proper Prior Planning. The greatest strength is in the preparation, being organised and doing your due diligence.Firstly, you need to ask yourself, what do you want to achieve with your investment? There are generally five common answers to this question, which are:
- Renovate and flip
- Buy for a child’s future home
- Build a property portfolio
- Look for residual income, or
- Set yourself up for retirement.
These answers all have different outcomes with regards to the investment approach and what you should purchase. Knowing the main purpose and goal behind your investment will help narrow down the kind of properties you should buy and where you should be looking.
The second question you need to ask yourself is, are you after cashflow or capital growth? This will determine if you should be buying a house and land or an apartment.
Location is key
The most sought-after feature that plays a key role for renters is the location. Consider which property will provide you the return you’re after and what areas you believe have the potential for high growth and yields. Of the 120 transactions we conduct at The Agency each month, the old cliché of ‘location, location, location’ is one that I have seen to be true. An appealing standout feature is accessibility to public transport, along with close proximity to the local village with cafés, restaurants, supermarket and retail stores. These support a good lifestyle for tenants and for those with children, school zones are important.
When purchasing an investment property, you also need to take into consideration whether you’re buying in a high investment area. If you are, take a look at your competition and the neighbouring development. How is your property going to stand out to future tenants?
Features to look for
Comfort, fixtures, and fittings are three things that tenants look for in a home.
Features that add value to your investment property from a tenant’s point of view are built-in wardrobes, carpet vs hard floor, air-conditioners, a dishwasher, number of bedrooms and bathrooms, parking, access to the elevator and if it’s pet-friendly. Tenants will stay longer if the owner will allow pets. Moisture and ventilation issues are also impactful and can get overlooked, but make sure this is covered in the building inspection, as any issues with ventilation can be costly down the line.
Tenants like to be mobile and tend to move every 12-18 months, that’s why they look for a place that already has the major appliances and built-in wardrobes, this will reduce the number of furniture items they need to move into their new home.
Buying new or buying old?
Another expense to take into consideration for an investment property is the maintenance. It’s recommended you update a home every five to seven years due to the wear and tear that comes with people moving in and out. A new coat of paint, replacing worn carpet or updating kitchen and or bathrooms, attending to leaky taps, overgrown gardens – just to name a few updates. These improvements will keep your investment property looking fresh and maintain a level of attractiveness to potential tenants. You also need to be mindful of future costs that can come up sporadically, like a replacement of a hot water system.
All property owners need to ensure their property is compliant (check with your local state’s legislation) and are following the specific regulations when it comes to water usage, blinds, windows and smoke alarms etc. These items will have to be certified and checked regularly.
Buying an older home will involve higher renovation costs if bought unrenovated or partly renovated, and you will need to budget and plan for this down the line. Have a look at what the property potentially needs attended to and expense and budget the cost over the next 10 years. As tenants tend to move around more these days, we’re finding that the competition is higher, and renters can find a more attractive, updated home for a better price. That’s why maintaining a high standard has become even more important today.
Other costs to consider are property outgoings including, council rates, water rates, land taxes, insurances and factor-in vacancy periods – a period when your property is vacant during the year, change of tenancies. I highly recommend landlord insurance to investors, keep your investment protected. If anything was to go wrong, this small annual expense could save you considerable money in the long term and will give you peace of mind.
The time to buy is now
Before jumping on the investment train, make sure you have the three Ps covered and that you have done your own research to create a strategy that you will stick to. Connect with a financial planner who understands property, negative gearing and cash flow. Another key connection is establishing a good relationship with a real estate agent who understands investment legislation, who has avenues to professionally market your investment property and who is experienced in property management. Choosing the right agent will help you save money in the long term.
One point I need raise, is that with the coming federal election in late May, the Labor Party has proposed changes to negative gearing from January 1st 2020. If the Labor Party is elected, the need for an experienced real estate agent and financial planner will be all the more important.
The softened market that we’re currently experiencing does make it an opportune time to buy an investment property, given the attractive prices.
Maria Carlino is the National Director of The Agency’s Property Management team. With over 25 years of experience in the real estate industry, she’s a wealth of knowledge when it comes to property investments and knows what tenants are looking for.