When it comes to buying investment property, the moral lesson usually bandied around is to buy with your head not your heart — after all you’re not going to be living there.
But is this really the case? Real estate consumer advocate Neil Jenman, says he does not always agree with this argument.
“It’s a line used by spivs and spruikers to sell property to you that you don’t like,” Jenman says. “If you wouldn’t live in it yourself, why would you expect somebody else to?”
There does seem to be some logic in that argument, but you still have to look at the financial practicalities of whether you are buying the property at a good price, what the yield will be, the rental income and the rental vacancy rate.
Obviously in the current market, with prices low, interest rates low and rents looking healthy, the yield is reasonably attractive on most properties but it only takes one of these variables to move in a different direction to change the landscape. And there are already signs that the weak economy is forcing landlords to keep a lid on rents.
Patrick Bright, author of The Insider’s Guide to Buying Real Estate stresses the importance of doing your homework and buying the right sort of property for a particular area. For instance, in inner-western Sydney, terrace houses are in far greater demand than apartments.
“Go and see property managers in the area and ask them what kind of properties are in demand,” Bright says. “It comes down to supply and demand. Buy where you think there is a current shortage of supply and plenty of demand.”
Other key factors include being close to transport and shops, having parking and offering a functional and flexible floor plan. If you are buying in the inner city then proximity to schools is way down on the importance list.
Your overheads such as strata fees are also an issue when you buy as an investment as these can eat into your profits. If you buy into a small block then the fees may be around $700 a quarter compared with say $1500 a quarter for a block with a concierge, swimming pool and gym.
While presumably the rents will be higher in the more expensive block, it may not be sufficient to make up for the higher ongoing fees. And add to that periods where the apartment may lie empty and the difference would be more serious.
“You don’t want high overheads,” Bright says. “You have to look at what would happen when times are lean.”
Bright also says you need to understand a suburb’s make-up. Just because one property sells at a certain level does not mean that it is across the board — there can even be differences in the same street. By buying on the low side of the street rather than the high, or at one end rather than another can make a 15-20 percent differences in the value.
It’s another instance where you need to do your homework well and understand the true value of your investment property. After all if you pay too much for a property, not only will you find you lose the first year’s capital gain but the chances are it will be harder to rent.
So don’t get carried away by the pretty picket fence or the bidet in the bathroom — these are not necessarily the factors that will deliver the highest yield. Buying at a good price, having a good rental track record and having low overheads are the factors that really count.
Investment property considerations
- Is the property close to amenities, for example shopping centres, universities, schools, libraries, and public transport?
- Does the property have some flexibility when it comes to groups of people renting? That is, are there two bathrooms for a two-bedroom place, two car spaces if the home is not close to transport?
- Is the property structurally sound property so that does not need too many things fixed on a regular basis?
- Does the property have a garden which takes a lot of effort or cost to maintain?
- Do you have a good property manager to take away the stress of managing a rental property?
- Can you afford the repayments for the rental property as well as all your other costs if the property is not tenanted for a long period of time?