20 Criteria For Choosing The Right Property Investment - January 2023
January 12, 2023 / Written by Rich Harvey
Property investment can be an exciting and rewarding journey. It can also be fraught with challenges and risks. The difference between a successful outcome and a devastating loss comes down to your asset choices.
Jumping into buying an investment without understanding what drives growth and returns is dangerous.
To help here’s my 20 criteria for selecting the right investment property.
1. Location and position
Location refers to the suburb in which you buy, while position relates to where the property sits within that suburb.
Location is the golden rule of real estate. A mediocre property in the right suburb will do far better in terms of capital gains and rental potential than a stunning home in a terrible location. You need to ask yourself what is prompting buyers to purchase here and, more importantly, what might increase demand in the future.
Never choose an investment purely on price. Price should be treated as a measure of relativity to determine if a suburb and property has potential for capital gains and strong rental returns.
We see this in discussions around “bridesmaid” suburbs. These are suburbs which are located adjacent to high-profile, more in demand areas. Bridesmaid suburbs will appear relatively affordable compared to their blue-chip neighbour – particularly if they have similar access to the same services and facilities. As such they can deliver excellent investment potential in many instances almost regardless of price point.
3. Rental yield/Cash flow
The amount of rent your property generates relative to how much it costs to purchase will be an essential measure during asset selection.
Rental return is expressed as a percentage called “yield” and is calculated by dividing the annual rental income by the property’s purchase price.
So, a property that costs $500,000 to buy and can achieve $400 per week in rent (which equals $20,800 per year) has a rental yield of $82,000 ÷ $500,000 = 0.0416 = 4.16%.
A very broad rule of thumb states that the higher a property’s rental yield, the lower its potential for capital gains. So, if you need a high rental return to help service your loan, you might need to sacrifice a little capital gains potential to achieve that.
4. Population growth and demographics
Studying current and potential population growth highlights areas where demand for housing will continue to rise, thus helping drive prices. Analysis of a suburb or region’s demographics reveal the best type of property to buy in an area. For example, buying a one-bedroom investor unit in a suburb dominated by families would be a bad decision.
5. Rental vacancy
A suburb’s “vacancy rate” describe the percentage of the total available pool of rental properties that are sitting vacant at any given time. A balanced rental market traditionally has between a 2% and 3% vacancy rate. If its below 2% the demand from tenants is outstripping the supply of rental property, so rents tend to rise. Above 3% and the reverse is the case, so rents will likely fall.
6. Days On Market
Days On Market (DOM) describes the average number of days between a property being listed for sale, and when it sells. In high demand areas, DOM will be low or decreasing. Competition will compel buyers to act quickly and that often means increased offers. Conversely, when the DOM is high or rising, buyer demand is low or slowing, which means less price growth.
Like price, DOM is best viewed as a measure of relatively between suburbs.
7. Stock On Market
Stock On Market (SOM) describes the number of properties for sale expressed as a percentage of the total properties in an area.
The lower the SOM, then the lower the supply of property (or the more demand there is for it) which is a pre-indicator of rising prices. Vice versa, a high or rising SOM flags the likelihood of softening prices.
8. Vendor discounting
The Vendor Discounting metric describes the difference between the original asking price set by the seller, and the eventual sale price of the property. Measured as a value across a large sample of sales, it reveals areas where vendors are needing to discount their initial price expectations the most (or the least) to achieve a sale. Low vendor discounting equates to high buyer demand, and vice versa.
9. Auction Clearance Rate
A popular metric that defines the percentage of properties listed for auction that sell during a specified time frame. Often measured and described over a weekly basis, this is a useful metric in markets that utilise auction as a common method of sale such as in Melbourne and Sydney.
A big part of the auction clearance rate’s value as a metric is its timeliness because you can measure it from one week to the next almost in real time.
10. Ratio of Owners-Occupiers to renter
This measure describes the percentage of people who own a home vs those who rent a home in each suburb. We like suburbs where the ratio exceeds 70%.
As an investor you want areas where there are a larger proportion of owner occupiers. Firstly, there will be less investors competing for the available pool of tenants in these suburbs. Secondly, owner occupiers tend to take better care of their property than tenants and improve the street appeal and streetscape of the surrounding area.
11. Online search interest
Online search interest refers to the ratio of people searching for property online relative to the total number of properties for sale in a suburb.
Listing portals such as realestate.com.au and domain.com.au have become the primary sources for those seeking a property. As such, tracking the ratio of buyer traffic engaging with the total listings is an immediate measure of demand.
12. Value adding potential
Properties that have a value adding “twist” – such as the ability to be renovated, subdivided, extended, redeveloped or reconstructed profitably – will achieve a price premium from buyers.
Assessing the value-adding potential of an asset requires an experienced eye as there are multiple considerations. You need to understand costs, overcapitalisation, end sale prices, and town planning issue among myriad other elements.
As an overall concept, rarity tends to equate to higher value. That said, uniqueness as a value-add in real estate is a tricky, qualitative-based concept. For example, you want to avoid cookie-cutter unit or same-same house designs in an area, because buyers will have multiple identical options among listings from which to choose.
By the same measure, a property with highly bespoke design and finish in a house might only appeal to a limited pool of buyers or renters.
The idea is to shoot for a home that offers functional and broadly attractive features such as a large land area or additional useable bedrooms/living areas that enhance it as a residence but are not commonly found in every home throughout a suburb.
14. Employment opportunities
Diverse economic drivers and opportunities for new residents to have gainful employment are key to price growth, especially in non-metro and regional suburbs. Workers need a place to live and strong employment prospects will attract more population to an area. The end benefit is for landlords because demand for shelter increases which drives up rents and values.
15. Proximity to amenities
The ability for residents to access attractive lifestyle amenities can’t be ignored. There is nothing like being within walking distance of a fabulous café and restaurant hub to help increase demand. Then there’s public transport options for easy commutes to and from the CBD, coasts or hinterlands. Add in elements such as parks and community facilities like pools and sporting venues, and you start to get the idea.
16. Zoning and title type
Always check the zoning of both of your property and the surrounding properties. Is there a chance your investment could be beneficially redeveloped down the track? Also, do surrounding zonings put you at risk of being adjacent to an undesirable land use in the future, like a high-rise tower or commercial building?
In the same vein, check all town planning issues such as heritage orders, vegetation protection, height restrictions and any other limitations that may affect value.
Also, while most property is freehold or strata, make sure you check the title type. Buying a company title or community title property could have implications for your finance approval or may come with ongoing excessive body corporate charges.
17. Age and condition of the property
The age and condition of an investment can hit your hip pocket in different ways. Older homes require more maintenance. In comparison, new homes should need less ongoing repairs, but they will cost more to buy than an established, older investment.
There are elements like depreciation allowances you may want to factor in as well.
The golden rule is to employ a building inspector to give the property a thorough look over as soon as possible.
18. Floor plan and functionality
This describes how liveable the home is. Have you ever been in a four-bedroom house and found that its thoughtless layout makes it feel less able to accommodate a family than some well-designed three-bedroom homes? I see this constantly during inspections.
Think about function and flow. Also, what’s the property’s aspect? Does it allow for easy heating and cool? Will it be flooded with natural light? This criterion really requires an inspection by someone with experience and a keen eye.
19. Construction type
Wood or timber? Concrete or stone? Fibro or weatherboard? Construction materials play a huge role in ongoing, long-term maintenance. Remember – this is a financial decision, not an emotional one. Look for structures with durability and resilience.
20. Finishes and inclusions
Look carefully at the asset’s finishes and fittings. High end fitout is not required for a successful rental, but functional, durable appliances and materials are key to keeping tenants happy, and repair costs low. Seek things like stone benchtops, timber floors, easy clean stainless steel surfaces and so on. This is doubly so when buying off-the-plan property. Be meticulous in checking through the inclusions list.
As you can see, working through investment property criteria can be exhausting, but it’s essential if you want to yield excellent results. To ensure you’re purchasing the best possible investment for your needs, employ a buyers’ advocate to source, sort and secure the right asset for you. It will save time, stress and deliver an exceptional outcome.
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