Finding the right investment property is all about knowing what your goals are.
According to property experts, buying an investment property (as opposed to a home to live in) should be purely a financial decision, ideally void of all emotion.
It’s important to think like an investor and understand the goals and strategies behind successful property investment.
3 potential property investment goals
When setting investment goals, you’ll need to work out exactly what you want to get out of your investment property, says Angus Moore, economist, realestate.com.au.
“If you’re after steady cash flow, then you’ll want to look at a property with higher gross rental yields and lower outgoing costs,” Angus says.
“Units perform really well in this respect and can be an attractive option for investors either just starting out, or looking to add to their portfolio.”
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Property investors have clear goals in what they want to achieve, which then guides their choices. Picture: Getty
Many investors typically invest in real estate for one or a combination of reasons, and the following elements are things you should consider on your property investment journey to get the most out of your potential investments.
1. Cash flow
Cash flow relates to the amount of money moving in and out of your investment.
It’s important to be realistic about what your personal financial situation is, and what potential costs there are, because it’s not just the upfront costs of buying a property – you also need to consider ongoing costs such as maintenance, rates, insurance and property management.
“Investors should do their research, speak to their lender and get an understanding of the process, including what they can afford to spend,” Dr Michael Baumann Executive General Manager, Home Buying at Commonwealth Bank says.
“You will also need to consider what the upfront and ongoing costs associated with buying and owning an investment property will be; and what home loan might be most suited to their unique circumstances.”
Some property investors seek out a positive cash flow strategy, which means the income generated from the property exceeds interest repayments and other outgoing costs. This is also often referred to as ‘positive gearing’.
By contrast, negative gearing is when your rental returns are less than your outgoings. In this case, you may be able to claim these losses at tax time in the form of reduced taxable income.
“It depends on what you’re looking for, and what life stage you’re at as to whether you want to be positively or negatively geared,” Angus says.
“If you’re a retiree, you’ll likely prefer positive gearing, but if you’re looking to hold on to your property and gain capital growth over a long period, then negative gearing is something you can deal with.”
2. Capital growth
If a property increases in value from the day you buy it until the day you sell it, that’s called capital growth. Keep in mind there is always a chance that your property might decrease in value as markets shift.
To maximise your capital growth over the medium to long term you should consider buying a suitable property in an area at the bottom of a demand cycle and hold onto it long enough for demand to increase and for it to appreciate in value. In the meantime, investors may be able to benefit from negative gearing.
“Most property markets typically experience ‘cycles’ whereby demand and supply ebbs and flows, leading to increasing, decreasing or flat average capital growth over time,” Angus explains.
“But for strong capital growth, it’s really important to understand market conditions, the outlook for the suburb and whether there’s any infrastructure planned as this will play a big part in the appreciation of your asset.”
The ideal outcome from an investment property is strong capital growth. Picture: Getty
3. Rental yield
Yield is the ‘return’ you receive on a property investment – most commonly in the form of rent you charge.
Gross rental yield is calculated by totalling the income, or rent, you may receive from a property in a year and dividing it by the sale price, or value of the property.
While gross rental yield can be a useful general indicator, the net rental yield tends to be a more accurate estimate of your likely return.
This is when you factor in the other costs associated with your investment, including interest payable and other mortgage costs, taxes, rates and strata fees.
Depending on your investment strategy, your desire for positive or negative gearing could change. Picture: Getty
Once you understand what you want to get out of your property, then the hard work starts – what type of property do you want? Where should you buy? And who do you want to rent your investment property?
Decide on the type of property you want to buy
Depending on your budget and investment goals, you may be looking to buy a house, apartment, or holiday rental.
The type of property you buy will help determine the level of rent you receive and may involve different upfront and ongoing costs.
Decide on the location
This is one of the most important questions to answer when choosing an investment property. You should be confident that the property will increase in value over time and provide you with healthy rental returns.
“The location of an investment property can impact both potential capital growth and rental yield,” Dr Baumann says.
“Across Australia, properties near public transport, healthcare, food and retail facilities, childcare, education and other amenities are typically more sought after. While these properties may cost more initially, it can make a big difference to how much rent they attract.”
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However, you also need to be prepared for the potential that the property could decrease in value and may not provide rental returns.
Proximity to public transport, healthcare, food and retail facilities, childcare, school zones, and other amenities can make a big difference to how much rent you end up charging.
Once you’ve decided where you’d like to buy, look at the recent sold prices and rental prices of comparable properties in the area to get a good idea of what your rental yield is likely to be.
Where you buy is one of the most crucial elements in property investing. Homes close to essential amenities generally perform well. Picture: Getty
Decide on the features your property must have
Be mindful of choosing a property with features that will appeal to the type of tenant you want to attract. Remember – the features that are important to you may not necessarily be all that important to your tenant.
That said, certain features such as an internal laundry, balcony, second bathroom, air conditioning, car parking or extra storage often tend to be in demand, especially for investment apartments.
You can always make minor changes yourself to a property before renting it out that may boost your rental income potential. Sometimes, small renovations like updating the bathroom fixtures or even just a fresh coat of paint can make a difference.
If you’re not sure about what to look for in a property it’s a great idea to speak to a local agent to get a sense for what you should be looking for.
Research any planning approvals already in place
You’ll also want to understand if there are any future council plans for the area – will there be new major roads built? Any new infrastructure? New universities? Hospitals?
Learn about any overlays the area may be subject to such as flood and bushfire zones as this may impact insurance premiums as well as potential hazards.
All these things will help determine the future value of your home and may increase the sale price significantly if that’s your goal – so speak with a lender if you’re ready for the next steps in your property investment journey.