How to spot a good investment

How to spot a good investment

by | Feb 11, 2022 | Uncategorized

Not even a global pandemic can quash Australia’s obsession with bricks and mortar. We follow auction results like sporting fans and spend more than two and a half hours per week viewing property – whether it’s for a dream home, or the goal of starting an investment portfolio.

Although investor activity decreased during 2020 due to COVID-19, there are still keen buyers about hoping to make the most of low interest rates and less competition. Traditionally, properties close to CBDs, near employment hubs and public transport were highly sought after by investors, but the pandemic has changed the way we all think about property. As we head into 2021, savvy investors will no doubt be re-thinking their property choices.

How do you spot a good investment?

Once your financial ducks are in a row, you’ve spoken to a mortgage broker about how much you can borrow or refinance, and you’ve determined your ideal investment strategy, then you can get started on your property search. But what works for one investor, doesn’t necessarily work for another. With so many types of properties to consider, and such a variety of areas to invest in, it can seem like an overwhelming task. There are, however, a few golden rules of investing that can help you narrow the search.

Consider your investment strategy

Are you the type of investor who wants to hold out for a big pay day when you sell (or refinance) your investment property? Or do you want to cash in weekly as your tenant pays the rent?

Most cash flow investors are willing to accept lower growth rates, because they’re after the security of a regular income. This is the strategy often, but not always, favoured by retirees (or soon to be retirees) who are seeking a passive income stream.

Capital growth investors are happy to forgo weekly profit (or even be out of pocket if negatively geared) because they’re waiting for the property’s value to rise significantly. Those who choose this strategy often consider using the equity from capital gains in their investment to fund another property purchase and potentially build a portfolio.

Crunch the numbers

It’s important to understand what rental yield is, and how it works. Rental yield is essentially the amount of money you make on an investment property by measuring the difference between your overall costs and your rental income. Put simply, you can work out the rental yield of a potential investment property by measuring the profit you would make each year as a percentage of the property’s value.

Gross yield is calculated through annual rental income and property value, while net yield is calculated by including all expenses involved. Ultimately, an investment property with a high rental yield equates to a greater cash flow.

Get to know the neighbourhood

It’s tempting to stick to what you know, but there’s no reason you should only invest close to home. Through thorough research, or the help of a trusted buyer’s agent, you can discover previously unknown neighbourhoods that are potentially profitable.

When shortlisting suburbs for investment look for areas with high price growth. So find out which areas are expanding in terms of population, the local economy and infrastructure. Become an expert in the area and research any proposed planning changes which may affect future property prices. Government and council websites often have a wealth of information on project proposals such as schools, shopping centres, hospitals or other amenities.

Understand the law of supply and demand

It’s an age old concept, but it’s just as apt today than ever. The more a commodity is coveted (and the less there is of it) the more people will pay for it – and real estate is no different.

Vacancy rates, which show the percentage of empty properties available on the rental market in a suburb, are a key indicator of the supply and demand of an area. If the vacancy rate for a certain type of property in a particular neighbourhood is low, but demand is high, then tenants naturally have less to choose from. As a result, those properties have more potential of rental growth and are less likely to sit empty between tenants.

Investors should also get to know what tenants want. By choosing a property type that appeals to a wide range of tenants, you’ll find it easier to lease. But it’s also imperative to understand the local demographics. For example, a one-bedroom unit might be the right price for your budget, but if the neighbourhood is full of families, then you may have missed the mark.

What’s your property type?

When searching out an investment property, be sure to create a “must-have” list so you can efficiently shortlist suitable properties. Be sure to keep your emotions out of the process, because what you would want in your home is not as important as making sure the numbers stack up.

Consider the ongoing costs of certain properties; a large established house might have high maintenance costs, while a unit in a building with loads of amenities could have hefty strata fees.

It’s also important to carefully consider whether you are prepared to renovate. Some investors reap the rewards of buying older homes and renovating them to obtain high rent or a quick flip. However, the “worst house on the best street” is not always a get rich quick scheme. It’s important to do the sums on renovation works, holding costs and potential rent or resale value before making an offer.

If you would like to discuss your investment strategy or crunch the numbers for a new investment in 2021, please give us a call today.

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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised adviser before making any decision regarding any products or strategies mentioned in this communication.

Whilst all care has been taken in the preparation of this material, it is based on our understanding of current regulatory requirements and laws at the publication date. As these laws are subject to change you should talk to an authorised adviser for the most up-to-date information. No warranty is given in respect of the information provided and accordingly neither Alliance Wealth Pty Ltd nor its related entities, employees or representatives accepts responsibility for any loss suffered by any person arising from reliance on this information.