Seven tips for buying an investment property

Financial journalist and commentator on 3AW and Sky Business
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Whether a residential investment property is owned within super or outside super, the principles of making the investment don’t change. You’re looking to buy the best possible property to give you the highest, most sustainable income stream possible.

Here are seven tips on the choices you’ll have to make: location first, and then property.

1. Look for ‘lifestyle’ locations.

There will always be demand from both owner-occupiers – who set property prices – and renters. It’s all about thinking like the tenants you want to attract. If you’re looking for affluent young professionals with disposable income, you want to be near the café scene, restaurants, cinemas, or beaches, in some cities; while also being close to public transport links to the city. Families will place more importance on proximity to good schools (or the public transport links to make good schools accessible), nearness to hospitals, parks and shopping centres.

Tenants drawn to lifestyle hubs are more likely to wear higher rent (and rent increases) than families in outer areas.

2. Don’t go for the lowest common denominator.

You’re looking for a suburb (or regional area) where there is high rental demand: there will usually be something that generates that demand, and a palpable buzz of activity – for example, a university or a big hospital. That’s fine, by all means ride on the wave of lifestyle that these kinds of neighbourhoods bring, but that doesn’t mean you should be looking for a low-quality house to rent to students or nurses.

3. Try to buy in an area that is going through ‘gentrification.’

As certain suburbs graduate to hip lifestyle hubs, they get more expensive. But the spillover effect from disappointed buyers and renters starts to seep into adjacent postcodes. Try to identify this cycle, and play it. Buy where there is limited land available – not where there’s a lot of new developments, or lots of open spaces. If there is plenty of scope in the area for new development, then that could push down prices.

4. Don’t go on gut feel – use all the research tools you can.

As with investing in shares, these days there is a large amount of historical performance data and research on residential property [see our exclusive data here]. There are many data sources that you can use to track and forecast the performance of your residential investment, such as Australian Property Monitors, RP Data, Residex, SQM Research, Ironfish, Metropole and Prices, capital growth, rental returns, vacancy rates – you can never get enough information on the suburb in which you’re thinking of buying.

5. Both buyers and renters will pay a premium for peace and quiet and convenience.

Everyone wants a quiet, tree-lined cul-de-sac close to a park, but they’re rare. You do need to look for some sort of ambience. If you’re looking at a property in what you think is a quiet street, try to make sure that it is that way all the time: try to check out what it is like during the morning and afternoon ‘school runs’ – it might be a cut-through street – as well as the office peak hours. If it is close to a lifestyle hub, just make sure that it is not too close to that late-closing pub that does great business at weekends.

6. Detached houses versus units

Detached houses tend to provide better capital growth than units, because of the underlying land value. But apartments often generate higher income yields. Remember that an established property has a better history to it, you can get comparable sales history, and you have at least the opportunity to buy below intrinsic value.

Then you have to think about the ‘feel’ of the property: again, thinking like your potential tenants. If you want to attract families, the more bedrooms you can offer, the better. Don’t go for one-bedroom or studio apartments – it cuts your options, even if it makes it more affordable. If you do want to go for smaller apartments, a good rule of thumb is to look for properties larger than 50 square metres – especially if you are borrowing from a bank as many have a credit standard that prevents lending for an apartment under this size. If possible, try to offer a functional floor plan, a balcony, internal laundry and off-street parking space – the kinds of things that tenants want.

7. Get help and get it right.

Before you buy, get all the professional help you need. A building survey, property inspection and pest inspection are a must and will tell you what condition the property is in, and give you a good idea of the required maintenance spending for which you will need to budget. It never hurts to get more than one opinion either. Then, when you are ready to buy, use the help of a buyer’s advocate or some other form of professional help – at least run your checklist past a property professional. Be careful from whom you get advice – a project marketer won’t charge you anything, but he or she could be in line for a 10–15% fee from the developer. If the advice is free, be cautious about it.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.