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how to pick a 5 star investment property |
People often ask us what makes a property a good investment. In fact, it's probably the question that most people ask! The short answer is very simple: a property is a good investment when it's in a desirable location and can demonstrate the potential for long term growth.A much longer and more complex answer is that there are many individual factors that make certain properties better investments. The good news is that all of these factors are encompassed in the Which Property? five-star property rating system and it is this criteria we use in the selection process before we recommend any properties to you. In this issue of Back-to-Basics we will examine the Which Property? five-star rating system in detail. If you've ever wondered what's behind the four categories of — location, design and build quality, tenantability and return on investment — here's your opportunity to find out! 1. LocationThe location is, of course, the first factor to consider when selecting a property. So which location will have the greatest potential for capital growth? Fundamentally, this comes down to finding a location where an increasing number of people want to live, and one that will remain popular in the future. If you get this right, you are almost guaranteed long term growth. However, as always caution is required. If you buy in an area that is currently booming and the reason for the growth is based on an industry; one that may have a limited future, then the reason for that demand can quickly vanish. It is the old theory of supply and demand. Areas that are experiencing consistent and strong population growth are particularly appealing and usually outperform the general market. Specific areas in South-east Queensland are prime examples of this demand, as people continue to flock to Brisbane, the Gold Coast and Sunshine Coast from interstate and overseas. Of course some suburbs hold more investment promise than others. Properties that are close to the inner-city are generally highly desirable and have consistently outperformed the general market. These properties have always been desirable and have displayed strong capital growth over the long term. Recently these properties have become even more attractive from an investment point of view with increasing fuel costs and an inadequate level of infrastructure, particularly public transport, on the fringes of most major cities in Australia. Many of the old industrial areas close to the centre of our major cities have previously been considered undesirable from a residential point of view but this is changing very quickly as travel times and fuel costs increase substantially. We expect these trends to continue as the value of inner-city land increases and encourages industry to move out making way for a new wave of inner-city dwellers. Purchasing property near the centre of a major city ensures that there is already existing and strong infrastructure in place and this creates a stable economic base for your investment. Good infrastructure such as shops, public transport, schools, childcare, doctors and hospitals for example mean lots of jobs. People prefer the convenience of living close to work. In addition, another attraction of inner-city living is the scarcity of available land to develop. Once again when something is in short supply, prices are much more likely to rise than fall. Tertiary institutions such as universities can also add great value to an area and the demand for rental accommodation. Remember, it's not just students who rent in these areas, as academic and administrative staff also require accommodation. Capital values in these areas usually rise strongly over time. Australian's are known to typically have a love of wide open spaces, but increasing densities in popular locations have made that dream a little more difficult to achieve. As a result, proximity to parks, golf courses and water - a river, lake, the ocean and of course proximity to the beach has become highly desirable. Because of limited availability direct water or beachfront properties that are close to amenities are likely to outperform the general market in the future. Waterfront/beachfront properties have typically experienced higher rates of growth over time and therefore better overall returns. Beachfront properties also offer the potential for not just permanent rental but also holiday rental and perhaps some family use. A property if selected well may also be the ideal retirement property. As you can see the location of your property is paramount to its future performance and a well selected location can provide handsome returns to the long term investor. 2. Design and Build QualityAfter location, the next most critical aspect in property selection is how well the property is built and even more importantly how well it is designed. This may seem a simple concept but the number of properties that underperform their potential because of inadequate attention to internal design is staggering. It would be difficult to over stress the importance of the internal design of a residential property. The involvement of a well recognised architect or developer can often signal that a property has strong investment potential. However, this alone is not enough. Every investment property is a substantial commitment in terms of financial outlay and a poorly designed property can have a significant impact on how your investment will perform in the future. It is critical that you examine in considerable detail the floor plan of the property you intend to purchase ensuring that spaces are functional and suitable for long term residential use. Some design aspects that you need to pay particular attention to include room sizes which should accommodate real size furniture, natural light, ventilation and aspect. Of course fixtures and finishes are also important as is an adequate level of storage. In addition, from a design and building point of view, it is important to understand that there is a fundamental shift taking place in the Australian property market. This is a result of the demographic changes that are occurring which are reducing the size of the average household formation. According to the Australian Bureau of Statistics, by 2026, two out of every three households in Australia will have two or fewer people living in them. What this means is that we will no longer need as many large homes as we once needed. Smaller and more compact properties will allow more people to live closer to our city centres or the beach where demand is higher. The challenge however is to design and build properties which meet the requirements of these changing and smaller household formations. Once again, as with location, the design and build quality of your property is critical to the performance of your investment. Which Property? always scrutinizes the design and build quality of properties before recommending them as suitable investments. 3. TenantabilityFor an investment property to perform well there are a number of location, design and quality factors that can boost your ability to attract and retain quality tenants. This is important given there is always rental competition. A property that has been designed and built well will always outperform a lesser quality property in the same area. Your rent will be higher and your tenants will stay longer providing you with a greater overall return on investment. In these times of high fuel costs a location close to good public transport will generally prove to be a better investment. Properties close to major infrastructure such as the CBD, a university or hospital and locations within an easy walk of the beach also have great appeal. In an apartment or townhouse complex, community facilities such as swimming pools, BBQ areas and gyms can also boost tenantability. These types of lifestyle facilities generally encourage tenants to stay for longer periods of time. Depending on the location of your investment it may be worth investigating whether the inclusion of a furniture package will increase the appeal of your property and enhance your rental returns. This may particularly be the case for properties in a CBD or on or near the beach. Also, once you have purchased your property, remember to inspect or at least have it inspected regularly. This will ensure that you can keep your property in excellent condition for your tenants. If you cannot inspect your property personally then you should organise your property manager to inspect it for you and provide you with a condition report. In any event, it is essential to have your property manager involved in the process as they will be able to assist with maintenance and any necessary improvements. Remember, tenants will only pay premium rents for premium properties. If you have had a 'good' tenant for a long period of time and they are paying market rents, this may be the perfect time to upgrade the property. Why not suggest an upgrade while they are living there? You can keep a happy tenant and continue to collect rent with no vacancy. Of course, a good property manager will make sure you are informed on a regular basis about the condition of your property and that your property is tenanted. If you have selected your investment property well, it is unlikely that finding and keeping tenants will be a problem given rental vacancies are so low around Australia. 4. Return on InvestmentUltimately, what every investor is seeking is a strong return on their investment — a cost-benefit analysis that comes out in front in the long term. The return on investment is a combination of capital growth and rental income and depending on your investment strategy there are different types of investment properties that may suit your individual circumstances. Properties that provide a stronger rental income generally have lower capital growth potential. The purchase price of these types of properties need to be lower for the rent as a percentage of the value to be higher. These properties are usually in lower quality areas, not close to strong infrastructure or the properties themselves are small or in poor condition. If this is less important then perhaps a 'premium property' is more suitable. These properties generally produce a much lower income based on the value of the property but much higher capital growth potential over the long-term. Which Property? generally recommend properties that should provide a good balance of capital growth and rental income over time. We recommend only brand new properties ensuring that holding costs are minimised and rents are maximised in the early years of the investment. Cash flow and holding costs are both important, but the potential for strong capital growth is where most long-term investment wealth is derived. Newer properties are always sold at a premium price in comparison to older properties. So why is this the case? New properties cost more to build, have greater depreciation benefits and less maintenance when compared to older properties. Also, new properties always achieve premium rents when compared to older properties. So there you have it - the Which Property? rating system demystified. It's important to point out that very few properties score perfectly against all of the criteria. There are many boxes to tick when making that final selection. Indeed, the best-quality, best-positioned properties are often out of reach for many people from a cost perspective. The Which Property? rating system recommends properties that achieve at least 3 1/2 stars out of 5. Of course, the higher the score, the better the property should perform over time. A good balance of all of the criteria including price will usually, and has historically, paid excellent dividends to the patient long-term investor. |