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How to choose the right investment property
April 14, 2015
Choosing the right investment property is a matter of both finding the right property, which requires knowing the market, and managing your investment so that, after costs, you ultimately make a profit. Both take a strategy and an appreciation of the legal and regulatory environment.
Start with a strategy
Historically, property always increases in value, but an investment strategy requires well-defined middle and short-term goals, as well. Are you looking to flip the property quickly, making a profit with some modestly priced improvements? Is your plan to hold onto the property for the longer term to take advantage of a rising market in a trending neighbourhood, or are you looking for an income stream from tenants? A balanced property investment portfolio, like your overall portfolio, should diversify risk, balancing highly speculative investments with safer lower-yielding ones.
Another helpful concept to have in mind is the difference between positive and negative gearing. It is possible for it either to work successfully, depending on the property and an investor’s tax plan.
A positively geared investment is relatively straightforward. Income from the property exceeds expenses. It produces net income, which is taxable. With a negatively geared investment, income from the property falls short of expenses. Negative gearing generates a loss, which can be used to reduce taxable income. The investor hopes to make up for the loss with capital gain when the value of the property increases.
Look into the future
Knowing historical trends is useful, but only as a way of trying to predict the future of a neighbourhood and a particular property. Always look for an area that has strong potential for greater than average growth. Some good indicators include upcoming redevelopment, transport infrastructure improvement or increases in demand due to changing lifestyles and demographics. Other metrics include supply and demand statistics, vacancy rates and unemployment numbers.
Family homes may have better potential for capital growth, especially with respect to the value of the land, rather than the structure alone. These may be especially attractive to young families with children, especially if the neighbourhood features good schools and parks.
Apartments, on the other hand, generally have a better rental yield, but two or three-story walk-ups have different potential than do high-rise apartments. The former may have lower overhead costs and better capital growth potential. The latter, however, may be particularly attractive to young professional singles, especially if the units feature great views or architecturally distinguishing features.
Once you have identified the target neighbourhood and target tenant or buyer, you can set a price point.
The general rule of thumb is to look for properties that are priced within ten percent of the median market price for similar properties.
Don’t Underestimate Costs
Buying, owning and selling costs can devour the value of an investment. It is hardly news to any property investor that a purchase will entail stamp duties, conveyancing fees, legal costs, search fees and building and pest reports. A sale similarly involves agent’s fees, advertising costs and legal fees. If your investment strategy involves flipping multiple properties, these can become quite considerable.
Owning property, either for rental or resale, implies ongoing costs, which can also be perilous. These include:
- Continued payments on the loan,
- Council rates, water rates, body corporate fees and strata fees,
- Management fees, if you choose not to manage a rental, yourself,
- Insurance costs, and
- Land taxes, in the case of a house.
If you own rental property, you should also probably count on some time when the unit is empty and not producing income.
Choosing the right investment property will require objective market research, a complete financial assessment, and a place in your larger investment strategy. What do you look for in an investment property?
Author: Rolf Howard, Owen Hodge Lawyers.
Rolf is a managing partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage legal responsibilities and opportunities to achieve competitive advantage.