Tips for selecting the RIGHT investment property
Here at Property Excellence we believe there is more to selecting the right investment property than just considering the ROI (return on investment).
Rental return
When I say rental return, I don't just mean the current rental return. Market conditions can fluctuate, which is why it is so important to factor in not just the current rental return (as the property may be listed for a sale in a market when rental demand and rental returns are high), but what the rental return for the property has been when the rental demand isn't as strong.
Some great ways of finding out and factoring in the rental return trends for the investment property you are considering purchasing include:
- Asking the listing agent for any rental history for the property - this includes the period of each tenancy (more on that in a bit) and the weekly rent for each tenancy.
- Speak with an experienced Property Manager in the area in which the investment property is located (or Property Manager's if you'd like several professional opinions), about the current rental market conditions and what the property may return in a less demanding rental market.
Condition of the property
I can not stress enough the importance of obtaining pre-purchase inspections. My 3 pre-purchase inspection recommendations to all purchasers are:
1. Building inspection
2. Pest inspection
3. Plumbing inspection (including a camera inspection of any underground plumbing - as cracked pipes underground can get very costly when needing to be repaired)
These inspections assist you in ascertaining the condition of the property as well as determining any repairs & maintenance that may be required immediately, in the near future as well as down the track or ongoing. For example:
Immediate
Immediate repairs & maintenance may include repairing or replacing any inclusions in the property that are not in working condition (such as air-conditioners, ceiling fans, stove top elements, etc.) or repairing any safety concerns with the property (such as doors not locking properly or balcony railings being loose).
In the near future or down the track
Repairs & maintenance that may be required in the near future or down the track may include:
- Replacing items such as the hot water system, air-conditioning unit/s and stove/oven depending on their age.
- Replacing floor coverings or blinds, depending on their condition
- Repairing any underground cracked pipes that may cause blockages
- Re-waterproofing and re-tiling the shower, depending on its age and condition
Ongoing
Ongoing maintenance may include:
- 6 monthly or 12 monthly gutter cleaning (depending on the number of trees surrounding the property)
- Annual air-conditioner servicing/maintenance (the ongoing maintenance can vary depending on the type of air-conditioning unit)
- If the property has been affected by termites, the company in which carried out the pre-purchase pest inspection may recommend regular pest inspections to check for termite activity and termite preventive measures such a termite chemical barrier or termite bait stations
Vacancy rate
Just because a property has a current rental return, it doesn't mean that it has a rental return all year round. This is another reason obtaining the rental history for the property is so beneficial... it helps you to determine the vacancy rate (or occupancy rate) of a property.
There are varying factors as to why a property may have high and/or extended vacancy periods (or low occupancy periods). Some of these can include:
- Location of the property (for example some locations within a town may be more desirable to tenants and therefore lease quicker than properties located in less desirable locations within the town)
- The general rental demand for the town you are purchasing the property in
- The quality of the Property Manager / Property Management department that is managing the property (for example their advertising techniques, whether they are proactive in tenanting properties promptly, whether they provide a positive experience for tenants and in turn attract tenants to rent through their Agency)
Quality of tenant
The quality of a tenant can have a HUGE impact on whether the property is a good investment property. When I say the quality of a tenant, there are 2 scenarios I'm referring to:
- The quality of the tenant currently renting the property
- The quality of the tenant the property is likely to attract
The quality of the tenant currently renting the property
If you are purchasing an investment property in which the current tenant is in arrears, frequently fails to pay rent on time, has poor property care or is causing damage to the property, the property itself may not make you money with the current tenancy in place, or worse yet, it could cost you money when it comes rental arrears, repairing damages, loss of rent whilst any damages or end of tenancy issues are being rectified or NCAT hearing/s.
Don't be alarmed though, if the property ticks all the other boxes for you, providing that the tenant is not on a fixed term lease, a property can be purchased subject to vacant possession, meaning that the current tenant can be issued a termination notice upon exchange of contracts, meaning the property will be vacant upon settlement and as such, you can select a quality tenant for your investment property.
The quality of the tenant the property is likely to attract
Much the same that the quality of the current tenant can have a HUGE impact on whether the property is a good investment property, the quality of the tenant that the property is likely to attract also has a HUGE impact on whether the property is going to be a good investment property for you.
Some factors to consider when determining whether the property is going to attract a quality tenant include:
- The location of the property
- The condition and features of the property
- The quality of the Property Manager / Property Management department that is managing the property (for example their tenancy application and tenant screening process)
Whether it's your first investment property or your next, just remember, when selecting the RIGHT investment property for you and your needs, there is so much more than just the ROI (return on investment) to consider.