Buying Investment Property
Buying Investment property
Elsewhere on this site we examine everything you need to consider when it comes to the nuts and bolts of property investment such as choosing a mortgage, taking advantage of tax incentives, assessing your finances and putting together a good team and a good company. Here in this article however, we will be concentrating solely on the most important aspect of the whole process – buying the investment property itself.
Many people coming to this site will be buying investment property for the first time but whether you’re going for your first, entry-level investment or adding to a small portfolio or whether you’re buying the latest property in your ever-growing empire, the principles of sound property investment will remain the same. Where possible, you should always be aiming for an investment property that offers you both short and long term rewards simultaneously through both rental and appreciation, whilst making sure you take as little risk with your money as possible.
Whether you can achieve all these things will depend on a number of factors. It might also be the case that you’re at a point where buying a negatively geared or positive cash flow property alone works best for your needs. But whatever your aims, the purchase of the property itself needs to stick rigidly to those aims and to sound principles, so that you ensure you get the right property at the right price to make the most of your investment.
Using equity to buy investment property at the right price
The ultimate aim for the vast majority of property investors will be achieving decent capital growth. This of course means that buying a property with the potential for significant capital growth is essential. As such, the act of buying (or building) your investment property at the right price sits at the very heart of successful property investment. Compare property investment with playing the stocks and shares markets – when you buy shares you know the price of those shares and you can normally assess the value of a company from its reports and from other sources. When you invest in real estate there is a lot more ‘wriggle room.’ This means there is both the potential to pay too much and at the same time, hopefully, to spot a bargain and purchase an asset for less than its market value.
How you do this will depend on a number of factors and a number of decisions you need to make. The first one will be whether you opt to invest in an existing established property or a new build. Both have advantages and disadvantages for you to weigh up. As you will see elsewhere on this site, existing established homes offer an easy way of buying an already-built and ready-to-go property with a history, a style and an easier-to-assess value. Because they have the potential for renovation they also offer a way to add value and increase profits. But they will also likely have more maintenance too and may be harder to sell on than a new-build. New builds on the other hand allow investors to precisely calculate their outgoings and to offer a new property to buyers with lower running costs and more modern and bespoke features. They also come with significant tax advantages when it comes to depreciation and are therefore potentially more likely to be profitable. But they will take longer to get up and running, will take more of your time and will require a great deal more research and planning as to property style and location.
Where to buy Investment Property – Location, Location, Location
And so to location, the be-all and end-all of buying an investment property. Pick the right location and your investment will likely be plain sailing. Get it wrong and you’ll be fighting against the tide for years. Questions you need to ask yourself about the location of your property investment include; ‘Does this area look like it will achieve good capital growth?’ ‘How is the rental market here?’ ‘What is the current supply of houses like?’ ‘What does the future supply of houses look like?’ ‘Is the area up and coming?’ ‘How are the schools here?’ You also need to do research into the infrastructure of the area, including checking for good public transport, proximity to major roads, planned government spending in the near future (or in the long-term future) and other similar factors. Doing this will help you to get an idea of the housing market that will develop in that location.
Assessing the Housing Market:
The whole point of doing your research on location and infrastructure is to build a broad picture of the housing market in that area and to get to the point where you know that housing market inside out and back to front. Clearly there is little point in you investing in the property market in an area if you don’t think it is stable. When you settle on an area you need to be 100% sure that it is either (a) stable or (b) on a strong upward curve. Once you are sure about this, you then need to assess what will be the most profitable properties within that area. And if you already have some properties in mind, you need to do a full assessment of the values of those kinds of properties (by their size and location for example) in order to fully understand their worth and perfect price point.
Thereafter you should be speaking with both local residents and estate agents in order to get to know which precise areas of the neighbourhood (and which exact streets) are the most attractive and sought after. (Here’s a tip – if one real estate agent recommends a particular street, go to another one working at a different company and ask them their opinion of the same street.) After you’ve done all that it is then time to get hold of an independent valuation of the area. There are a number of these released every year by independent valuation companies and which are used by real estate agents and lenders for their own internal valuations. They are therefore essential reading for any serious property investor. They contain information about the property values in the area, the demographics of the area, analysis of the suburbs and a survey of average rental rates. (If you are having trouble finding these reports, get in contact with us and we can help you get hold of them.)
Also, as mentioned above, don’t forget to get in touch with the local council to check whether there are any planned infrastructure changes or developments and whether there might be any private developments nearby that could affect the value of property you are investing in. Finally, get hold of the historic growth reports that are released by a number of respected independent property commentators so that you can study and understand the changing values of property in the area.
Assessing the Rental Market:
Exactly the same approach should be followed when looking into the rental market and rental potential of an area. All the things that you asked yourself about the location when buying a house are still just as relevant when looking into rental property. However, in addition you also need to make sure that there is a strong demand for rental properties in that area. It might be that an area is suited to wealthy home owners for example and therefore doesn’t have much demand for people who want to rent a property. Instead, look for neighbourhoods with a wide range of businesses and entertainment / dining areas and neighbourhoods frequented by a variety of people from various income brackets as well as students and young people. Such variety of demographics will give you a wide range of potential renters and ensure that you are not relying on one or two local businesses to prop up the rental market.
Again, speak to the locals and to real estate agents and rental agencies, to the colleges and to local businesses to get an idea of the make-up of the area. Also, get hold of the same independent reports on property in the area mentioned above, which will detail the average rents paid and the historic rental vacancy rates and current demand. Finally, keep in mind the calculation for rental investments – that you should ensure your property can return at least 4% to you. This works out as a dollar per thousand dollars per week. In other words, on a $500,000 investment property you should aim to be bringing in a rental income of at least $500 per week.