An article by Peter O'Brien
No matter how good the rental market is or how many prospective tenants you have on your database, some properties are just difficult to lease. The property might be priced right and presented well but it still sits on your rental list yelling “pick me” “let me be your new home”. More than likely this property doesn’t meet the right criteria of what makes a good investment property. In continuing on from my series of articles designed to provide some general knowledge to Property Managers about investing in property I have put together some key elements of what makes a property a good investment property.
When Clients come to me for assistance to invest in property I give them a quick rundown on the type of property that I consider to be a good investment. The following key elements need to be considered.
LOCATION LOCATION LOCATION… Where the property is located is the most important. Throughout time properties in blue chip areas have achieved overwhelming capital growth and continue to do so. A ‘blue chip’ area is a one which has consistently strong rental yields, and steady, long term, capital growth. These regions will weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth. Generally, these suburbs sit within a 10km radius to the CBD or areas that have abundant public transport, parks and water and a thriving cultural, restaurant and entertainment scene. Basically, the property needs to be close to infrastructure and have easy access to get to this infrastructure, i.e. closer to transport.
Property type. Whether the property is a unit or an apartment, a townhouse or a warehouse, isn’t as important as what the properties consists of. If we are purchasing a property that is to perform well in the property market over the long term, we look for property that has
- Off street car parking
- An outdoor area, either balcony or court yard
- It needs to be more then 50sqm and feel spacious
- A good exposure to natural light and be slightly elevated
- A pleasant outlook. A view that doesn’t consist of a brick wall.
- Limited fittings that are expensive to maintain or replace
- It must have heating and either air-conditioning or at least able to have air-conditioning installed
The right return on investment. This depends on the reason for purchasing a property, the type of finance available and the purchaser’s financial position. As property experts, we should be able to provide our clients with an estimate of rental return that an investment property could achieve in the current market. Similar to conducting a rent review. We like the properties to return 3.7% to 4.1%, or higher of course, to be considered as an option to purchase.
Target market. Properties that are designed to suit a specific market of consumers are not what I would recommend for my clients to purchase as an investment. “Student housing” or “over 50 year old residents only” style properties limit the population of prospective tenants when advertising for a new occupant to lease the property. I don’t recommend a property as a good investment if it attracts a limited market of prospective tenants.
Price & improvement. Obviously, a good investment is one that is not over priced. I do my homework and look for property priced right and use my negotiating skills to purchase it at a good price. This means buying a property below its intrinsic value, in an area that outperforms the average over the long term and one to which you can add value so you can create some capital growth. This could be through renovations, refurbishment or redevelopment.
This information is based on my opinion. I am not a financial advisor or planner and I am not saying that my opinion relates to all situations. I recommend people to seek financial advice from someone qualified to do so before deciding any investment choices. Everyone has different financial capabilities and expectations and all options available to Investors should be considered on a case by case basis.
Next time you have a property that is historically always difficult to lease try a proactive approach and provide your client with reasons why by using the above information as a checklist for what makes a property a good investment.