Whether you’re getting your foot on the investment property ladder for the first time or growing your portfolio of properties, choosing the right property is key. Although every situation is different and many variables can be at play, here are some important reminders to keep on your checklist when searching for a property that meets your needs.
You must make sure your investment property is in the best location for your investment strategy. Completing comprehensive research on the demographics of the area, future developments, the major attractions and local facilities is crucial. For example, is it an up-and-coming area that may gentrify quickly, allowing you to ‘flip’ the property ? Or is it in a long-established community where, say, tenants tend to be families who want to stay in a home longer-term and thus provide a stable return?
Your target market should also be considered when you’re narrowing down a location. For example, if you’re looking for a student-accommodation investment property, the property should obviously be close to a university with reliable public transport. Likewise, if you’re looking at the inner-city, knowing whether a property is close to a major transport hub can make a big difference to its attractiveness on the rental market (as can ensuring that it comes with a designated parking space).
The last thing you want to do is enter an oversupplied market. Do your research on the market you are looking to enter, because as many property experts say, Australia doesn’t have one property market, it has hundreds, if not thousands. For example, there was a focus in mid- and late-2019 on the oversupply of new apartments in Brisbane, Sydney and Melbourne, which meant rents were decreasing for both new and older apartments. Another good example is the experience in recent years of landlords who bought properties for top dollar in mining-focused towns, only for the mining boom end and their properties fall dramatically in value or remain vacant for long periods.
To ensure you don’t fall into a demand trap, some key things to look out for are the local vacancy rates, employment rates and rental yields. If the property is in an area of high or moderate rental supply but you still wish to buy there, the next step would be to look at how you can differentiate the property from the rest of the market.
Purchasing an investment property is a large outlay and you want to start making money from it as soon as possible. A fix-it-up property requires months of work before it can be tenanted, but the work you do means the costs of ongoing upkeep should be lower than on an unrenovated property, thus helping you recoup the costs of the reno over time.
But, for example, while an extensive and well-landscaped garden may increase street appeal, the upfront landscaping costs could outweigh the benefits if you’re unable to use this to secure higher rental payments, and the maintenance requirements may put off renters or add to your own costs over the long run.
Once you have completed the research and have a property in mind, you need to crunch the numbers. Mortgage stress is extremely high in Australia and you need to ensure you can afford the property long-term.
When talking about investment properties, people talk about holding costs, which are all of the costs related to owning the property, not just the mortgage repayments. Thousands of investors use our free PropCalc tool to find the true costs of owning a property. PropCalc takes everything you can imagine into account – from all of the purchase costs to ongoing upkeep – when calculating what type of cash flow you’d achieve from a specific property.
Property depreciation is the natural wear and tear of a building and its assets over time. When you own an investment property, you can claim depreciation as a tax deduction each financial year and pay less tax as a result. In fact, depreciation is one of the highest deductions available for investment-property owners. Most investment properties, both new and old, hold depreciation deductions but some hold more deductions than others.
When choosing an investment property, you can find out the likely depreciation deduction available with our free BMT Tax Depreciation Calculator. You can also read my previous column that looks at how to reduce tax and maximise depreciation on an investment property.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.
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