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Choosing an investment property

Reported by Sarah Mills
Monday, March 26, 2007

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By Sarah Mills

Choosing an investment property is a completely different prospect to choosing a home. A home is an emotional purchase based on any number of individual imperatives. An investment property, on the other hand, is simply a commercial prospect. So it's a matter of dropping your lifestyle hat and donning your financial cap when prioritising your criteria.

First and foremost, an investment property should be tenant friendly. This means it should be:

  • Close to amenities such as public transport, schools and shops.
  • Close to cities and major employers — usually within a 50km to 100km radius of a metropolis.
  • In a region with a diverse industry and employer base.
  • Appropriate to the demographic profile of its location. For example, if you live near a university where there are many students, units might be an appropriate investment. However, if you are looking at a community of retirees, residences with stairs could be crossed off the list.
  • Avoid features such as swimming pools and air-conditioning as these tend to break down creating unnecessary expenses.

Setting the search parameters

The next step is to narrow down the search to properties that meet your specific financial needs. When setting your search parameters, you might like to consider the following.

  • The type of property you are interested in
  • Target areas for investment
  • Demographic benchmarks
  • Price — it is important to set a price range that makes reselling easy.

Type of property

Different types of property carry different risks and returns. Strata title, for example, offers greater depreciation opportunities but generally higher costs, not to mention the burden of dealing with the body corporate.

Your investment plan and gearing perspectives will also have an influence on the type of property you choose. For example, new properties offer greater depreciation allowances, which would be helpful for those opting for negative gearing. For those seeking to maximise their income, older properties may have a lot to offer.

The main types of property the average residential property investor is likely to consider include:

  • land
  • units
  • houses
  • holiday apartments
  • serviced apartments
  • hotels and resorts
  • retirement villas

Target areas

You need to establish criteria for the locations in which you feel comfortable investing, keeping in mind that it is often advisable to diversify your portfolio across different States and regions to reduce your risk profile. Things to consider include:

  • Regions or states with different economic drivers
  • City or country properties, or a mix of both
  • Your familiarity with specific locations and their economies and contacts

Demographic and economic benchmarks

It is advisable to set demographic benchmarks to ensure you are buying in an area that will continue to provide an income in the future. These include:

  • Minimum population levels
  • Minimum population growth levels — nil or negative growth is a poor sign as it suggests growing vacancy rates and falling house prices.
  • Average age of the population
  • Number of local industries — if a town is highly dependent on a single industry then its fortunes will ride with that industry, affecting rentals and sales.
  • Number and diversity of large local employers. If a thriving town depends on only one or two large employers, it can be reduced to a ghost town if an employer closes or moves.
  • Number of hospitals, schools and government agencies

Beginning the search

Once you have set your search parameters, the search for an investment property begins in earnest. Properties can be sourced through a number of channels including:

  • Searching online for properties in your price range
  • Checking newspapers and magazine advertisements
  • Registering with real estate agents around the country
  • Joining a property club
  • Visiting expos and trade shows
  • Going direct to a developer
  • Developing a good relationship with your local real estate agent
  • Visiting real estate websites such as www.myhome.com.au and www.realestate.com.au

Research

Research is the best protection you have against buying a lemon. Following is a list of things you need to know as well as key sources of information.

  • Demographics. Past and present population rates, industry composition, age of population, average wealth of population, new housing starts and employment, all provide a good guide as to the nature and viability of an investment. Much of this information can be found from sources such as the local council, the Australian Bureau of Statistics, regional government economic development agencies and commercial property researchers.
  • Future of the area. You need to determine if a property that is a good investment now will continue to be so in the future. Industry and development forecasts, development applications, approved development plans and population growth forecasts can provide a good guide. They can be obtained from local councils or their websites.
  • Land availability. Low availability of land places upward pressure on prices over the longer term. Local council can help with this.
  • Commercial property vacancy rates. High commercial vacancies suggest a slow or slowing economy. This information can be sourced through online real estate searches or you can call local real-estate agencies for a fax of available properties.
  • Median property values and residential vacancy rates. Check the local real estate websites as well as property websites such as home price guide
  • Rental returns. Conduct a rental property search to determine average rental returns as well as supply and demand in various sectors of the market.
  • Employment. Check newspaper positions vacant columns to assess the employment market.
  • Strata title issues. Demand access to minutes of body corporate meetings. These should advise you of any major projects on the drawing board and of recently completed work. Determine body corporate fees, make sure there is a healthy sinking-fund balance and that the body corporate is financially stable. There are companies who conduct this research for a fee.
  • Off the plan. If you are buying off the plan, try and check the developer's credentials. You can ring the state fair-trading offices, conduct a company check though ASIC and do an online search for the business name and its director's names on the Internet.

    Cash-flow calculations

    Last but not least, you need to conduct cash-flow calculations to make sure the property is a viable investment for your portfolio. Things to consider include:

    • Depreciation allowances and tax deductions
    • Interest repayments
    • Purchasing costs
    • Ongoing costs — the amount of repairs that are due and the cost of managing the property. Questions you might like to ask would include: Has it been painted recently? How old are the fixtures and fittings? Will the fence or roof need replacing?
    • Can you afford it if the investment performs below expectations?
    • There are excellent software packages available to help with these calculations.


    A commercial decision

    By now you should have identified about 10 properties offering similar returns and risk profiles in each area under consideration. The next step is to put a low bid on all of them. Depending on the market, the odds are that one vendor will accept. An exception to this would be in Tasmania, where a bid is considered binding. Check your state laws before embarking on the bidding process.

23/12/2014 05:26Sydney, Australia. 23 December,2014
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