The mystery of property investment for most beginner investors: Which investment property should I buy?
Here at Property Analyser, we like to keep things simple (KISS). Einstein managed to explain relativity with just 3 letters: E=mc2. How hard can it be to simplify property investment? We are definitely not as smart as Einstein, so maybe 3 letters is pushing it a little. But at the same time property investment can’t be as hard as relativity… well let’s hope so.
Most things in life are as hard as we make them. The same applies to property investment. It can be simplified by following certain rules but at the same time it can also be made so complicated that it leaves us lost and confused.
Simple: 1 + 9 = 10
Complicated: (1 + 8 x 9/2 – 5 x 2 x 3 – 2) x 2 = 10
Same result: 10
Let’s keep it simple!
Here are the top 5 rules that we recommend any property investor should follow, whether you are a beginner or experienced investor:
- Buy as low as possible.
- Development potential
- Rental Demand
1. Buy as low as possible
No big secret here. If you can buy anything lower than the market value then you have made an instant profit.
How do you buy something below market value? Through persistence.
1. Find investment properties. Not 2 or 3, but +10 properties.
2. Inspect properties and find faults with them. These will help you during negotiations.
3. Negotiate hard. Stay nice and respectful but do not accept a price that doesn’t make you a profit.
4. If the seller doesn’t accept your offer, move on to the next property. You might go through 20 properties and negotiations back and forth but remember that you are making an instant profit if you are successful.
Remember persistence is key.
We’ve all heard it location, location, location…You need to buy a property in an area where the majority of people want to live. Again no big secret here. The majority of the population lives within a 10 – 20km radius of a CBD. Therefore this should be your primary target area. Focus on suburbs close to universities, public transport and business districts.
The value of a property lies in the land. I’m sure you’ve probably heard this a few times. Over time the property’s value increases but the value of the house decreases, since it gets older and starts breaking down. It’s the land value that contributes to the increase in value of a property. Therefore you should maximise the land component of your property. This means that most likely the investment property you will be looking for will be a house. However that is not to say to completely ignore townhouses and units. They can be good investments and depending on their location can be more in demand (rule 5.).
4. Development potential
Can the land be subdivided? Can a multi-unit structure or a commercial building be constructed on it? The answer to these questions depends on the restrictions that are placed on the land, its location and the surrounding developments. A property with development potential will be worth more than one without.
1. Chose a property with the least amount of restrictions on it and a zoning that allows for more than just one dwelling to be constructed on the land.
2. If the property does have restrictions, check the surrounding developments. Would the new development fit with the surrounding buildings? If yes, there is a chance that the development restrictions could be removed in the future.
3. All this information can be obtained from the Council website. However if you can’t find the details on the website, you can directly call the council.
5. Rental Demand
The most important rule of property investing, in our opinion, is rental demand. The rent you will receive from the tenant will cover most of the property expenses, and in case of a positive cash flow property it will provide you with extra income. Look at the rental income as the income of a business or the salary of a job. You wouldn’t be purchasing a business if it wasn’t generating enough income and neither would you take a job that doesn’t pay you enough salary. Why purchase an investment property that doesn’t generate enough income?
Invest only in suburbs that have a vacancy rate of no more than 7% and at least 30% of the population are renters.
Some of you might ask yourselves: What about capital growth? Properties that satisfy all the 5 rules above will have a high chance to grow steady in value over time. Investing in a property solely for capital growth without having meet some of the 5 rules can be a recipe for disaster.
This was our quick summary of the top 5 key characteristics that make a good investment property. They should, hopefully, give you a clearer picture on what you should look out for when searching for your next investment property, or at least provide a starting point.
All the best in your investing,