What To Look For In An Investment Property?

An investment property is usually purchased to earn rental income and potentially grow in value over time. For this reason, the features you look for may differ from those you would choose when buying a home to live in.

Property investment can offer potential benefits, but it is important to have a clear plan and make careful decisions based on the expected returns. Factors to consider include the location, property type, age, features, potential growth in value and possible rental income.

This article takes a closer look at each of these factors.

Tips For Buying An Investment Property

Be Clear On Your Goals

Consider both the possible benefits and risks of buying an investment property. Make sure you engage a financial planner and accountant and that you can afford the loan repayments without placing too much pressure on your everyday budget. You should also consider whether you are comfortable with risks such as falling property prices or higher interest rates.

Do Your Research

Before looking for a house, apartment or property in a particular suburb, find out how much you may be able to borrow for an investment property.

Consider whether you want to earn rental income now or hold the property as a long-term investment. You can then research its potential to grow in value, the rent it may earn and the ongoing costs involved.

Set A Budget Within Your Means

Lenders generally require a deposit of between 10% and 20%. You should engage a mortgage broker and make sure to budget for costs such as stamp duty, legal and conveyancing fees, insurance, maintenance and loan interest.

It may be helpful to consider how borrowing costs could affect your investment and compare the available interest rate options. Fixing the rate on part of the loan may provide more certainty by keeping some interest costs unchanged for a set period.

Check Your Credit History

Before you begin looking at properties, it may be helpful to check that the information in your credit report is correct. Visit moneysmart.gov.au for more information.

Decide Who’ll Manage The Property

If you have limited time or live far from your investment property, you may want to hire a property manager or real estate agent. They can help manage the property, but they will charge a fee.

You may also wish to consider insurance. Depending on the policy, it may cover events such as storms, building damage, contents and lost rental income. Cover and costs can vary between providers, so it may be helpful to compare your options.

Budgeting Smaller Costs

Consider the ongoing costs of owning an investment property, including:

• Council and water rates
• Strata fees
• Repairs and maintenance
• Property management fees
• Costs when the property is empty, such as lost rent and advertising
• Insurance, including landlord insurance
• Other expenses, such as land tax

You may also wish to set aside money for future renovations.

What To Check For In An Investment Property

Property Type

The type of property you choose may depend on your goals:

• Houses may grow more in value over time, but they can cost more to buy and maintain.
• Apartments and townhouses often cost less and may provide better rental returns, but they usually include ongoing strata fees.

Neighborhood

The area where you buy can affect the types of tenants interested in the property and how often it may be vacant. For example, a property near a university may appeal to students, although demand could be lower during university holidays.

It is also helpful to check the rental rules in your state or territory, along with any local council and body corporate requirements. Extra approvals may apply to some property types, such as granny flats, rooming accommodation and short-term rentals. In Queensland, owners must obtain the relevant approvals before renting out a secondary dwelling. For more information you can look at the Queensland Residential Tenancies Authority.

Property Taxes

Council rates and land tax can vary across Australia. Higher costs may still be manageable in an area with steady rental demand, but they should be included when estimating the property’s possible return.

You can check rates with the local council and find land tax information through the Revenue Office. It may also be helpful to consider whether these costs could rise, as rental income may not increase at the same rate.

Schools

If you are buying a family-sized home, consider the quality and location of nearby schools. While rental income is important, local schools may also affect tenant demand and the property’s value when it is time to sell.

Crime Levels

Safety can affect both tenant demand and property value. Check local crime information, including property damage, theft and more serious offences. Queensland Police provides online crime data that can help you compare areas and see whether reported crime is increasing or decreasing.

It may also be helpful to visit the neighbourhood at different times of day to get a better sense of the area.

Capital Growth Potential

Capital growth is how much a property increases in value over time. To understand an area’s past growth, check how its median sale price has changed over the past few years.

Our property market research tool provides information about properties and suburbs across Queensland. This includes recent sales, past price trends, local population details, nearby schools and median rental income.

This information may help you understand how the area has performed in the past and the property’s potential to grow in value. However, past growth does not guarantee future results.

Natural Disasters

Insurance is another cost to include when estimating your possible return. Premiums may be higher in areas at greater risk of floods, bushfires, cyclones or other natural disasters, which could reduce the rental income you keep.

High Rental Demand And Rental Yield Potential

Researching rental demand and rental yield can help you decide whether a property may suit your financial goals.

Rental yield compares the rent a property may earn with its value. Property costs may include council rates, body corporate fees, property management, maintenance, insurance and loan repayments.

There are two main types of rental yield:

Gross rental yield

Gross rental yield compares the annual rent with the property’s value, before expenses are taken out.

For example, a property valued at $750,000 that earns $750 per week would receive $39,000 in rent each year:

$39,000 ÷ $750,000 × 100 = 5.2% gross rental yield

Net rental yield

Net rental yield also considers the property’s ongoing expenses. For example:

• Council rates: $1,200
• Body corporate fees: $2,500
• Property management fees: $720
• Property insurance: $2,000

These expenses total $6,420 per year. The net rental yield would be:

($39,000 − $6,420) ÷ $750,000 × 100 = 4.3% net rental yield

These examples do not include home loan repayments. Actual expenses and returns will vary between properties.

Common Mistakes To Avoid

Even experienced investors can make mistakes. Some common issues to be aware of include:

• Choosing based on personal taste: An investment property does not need to be your ideal home. Focus on features that may appeal to tenants.
• Borrowing too much: Keep repayments manageable and allow for higher interest rates or periods without rental income.
• Skipping important checks: Review body corporate fees and financial records, and arrange a building and pest inspection before buying.
• Choosing a higher-risk area: Mining towns and areas with many similar apartments may carry greater risk. Research the local market carefully before making a decision.

Think Like A Business

Before buying an investment property, it is helpful to review the numbers carefully. You may should:

• Calculate your income and expenses at different interest rates.
• Budget for repairs, maintenance and property management fees.
• Compare loan options, such as interest-only and principal-and-interest loans.
• Speak with an accountant about negative gearing and possible tax deductions.

Speak To A Buyers Agent

Choosing a buyer’s agent early may give you helpful guidance throughout your property search. They can use market information and professional experience to help you compare locations.

However, data alone does not always show the full picture, and property forecasts cannot guarantee future results. A capable buyer’s agent will consider the available data alongside local knowledge, experience and a broader understanding of the property market.

The Bottom Line

Many property investment factors are connected. For example, a property’s location and age may affect how much it grows in value. It is helpful to consider the full picture before making a decision.

You may also wish to seek advice from a qualified tax professional. Rental income, positive or negative gearing, and selling a property for a profit may have tax effects.

A suitable buyer’s agent can also provide guidance during the buying process. Precision Property Buyers Agency team comes with the relevant experience, local knowledge and a careful approach may help you make a more informed investment decision.

FAQ

What Is The Most Profitable Type Of Income Property?

Properties that can be rented to several tenants may offer greater income potential. These can include apartment complexes and commercial office buildings.

How Long Does It Take To Make A Profit On An Income Property?

A property may begin earning a profit if the rental income is higher than all its costs. This also depends on the rent being paid in full and on time.

Will Adding Security Features Attract More Tenants To My Income Property?

Safety is important to many tenants. Suitable security features may make a property more appealing and encourage tenants to stay longer.

These features may include outdoor lighting, well-maintained trees and hedges, secure locks on doors and windows, an alarm system and security cameras. Any cameras should be installed and used in line with privacy laws.