Any piece of real estate purchased with the expectation of a profit is considered an investment property. Rent received from tenants, either permanent or temporary, might count toward this profit. Gains upon a later sale of the property are another possibility. Most property investors care about both of these factors.
Investing in real estate is typically done so as a means to build wealth and earn a passive income. This means that the criteria for a good investment property may differ significantly from those used to select a home for personal occupancy. Investing in real estate may provide a number of benefits, but only if you go into it prepared and make decisions objectively based on what will bring in the most money.
Consider the following aspects, all of which may contribute to the success of your investment.
The term "capital growth" refers to the rise in value of a property over time. Look into the growth-trend indicators for the property you're considering of investing in - what's the median sale price for the suburb? Is there evidence that it has grown in recent years?
You may get a feel for the rate of appreciation in target locations by using our property market research tool. Past sales data, demographic profiles, local schools, and average rental prices are just some of the details it covers for Australian suburbs.
You may use this data to estimate your potential long-term capital gains (the money you get from the appreciation of your property's value).
Rental income and demand
Rental income is a common strategy for investors since it may assist offset expenses. Assessing a property's financial feasibility involves doing research on areas with high rental demand and income.
The rental yield of a property is a measure of its potential profitability based on annual rental income less the annual cost of maintaining the building. The costs of owning a home include not just the mortgage but also taxes, insurance, upkeep, and strata fees. You should be able to offset at least a portion of these expenses with rental revenue.
It may be helpful to research the vacancy rates, average rental yield, median weekly rent, and prospective growth rate of comparable properties, as well as the sorts of properties that are in high demand among renters.
Gross and net rental yield calculations are possible. In order to calculate gross rental yield, take the entire value of the property and divide it by the anticipated yearly rent.
$26,000 ($500 x 52) / $500,000 = 0.052 x 100 = 5.2%
Unlike gross rental yield, net rental yield takes into account all of your expenses, including things like council taxes, strata levies, property management fees, depreciation, insurance, and more.
Continuing with the same scenario from earlier, let's say the full cost of property maintenance per year is:
$1200 in council ($300 x 4 = $1200)
Dues are $2,000 annually ($500 x 4 = $2,000)
Cost of renting a house, $520
Insurance for the home is $1,200/year ($4,920/year).
The property's net rental income would be:
$26,000 ($500 x52) - $4,920 / $500,000 = 0.042 x 100 = 4.2%
Note that this does not account for house loan payments, which may vary depending on your specific circumstances and can be estimated using our repayment calculator. Furthermore, the aforementioned figure is only an illustration and does not reflect actual property maintenance expenditures in any way. Costs and estimates may vary based on your unique circumstances.
The old adage about the importance of a property's location holds true not only for its residents, but also for its potential buyers. Consider what a renter might want in a home by putting yourself in their position. Tenants will be more interested in renting a home if it is close to public transportation stops, schools, and other commonly used services and establishments like grocery stores and coffee shops.
In more broad terms, a neighbourhood's safety and general atmosphere are also crucial criteria for figuring out its development potential. If, for instance, there are large-scale infrastructure developments in the region, more employment may become available in the neighbourhood, which would make the property more desirable and enhance its value.
Style of Real Estate
Whether you choose to buy a home or an apartment as an investment depends heavily on your financial situation, but you should also consider the property's kind in relation to its location.
In a family-friendly region, for instance, a house with a backyard is likely to be preferred by tenants over a small apartment. Similar to how there may be more demand for a modern apartment to rent near college campuses, where there is a large student population. It's crucial to take the local population makeup into account when making a decision.
Houses have greater purchase and insurance costs, maintenance needs, and average rental rates than apartments, but they also offer better potential for appreciation. Comparatively, the initial investment in a condominium is often less than that of a detached house, and there is typically less upkeep involved.
In truth, whether determining whether to invest in a home or an apartment, you need to consider a long list of ongoing maintenance charges, of which strata fees are only one.
The Property's Age
A cost-benefit analysis should take this into account. It's important to avoid investing in a home that will put a strain on your budget in the form of repair bills and other recurring expenses.
Properties that are many decades old may require more upkeep than newer ones, however this may vary depending on the state they are in. Before signing a purchase agreement, have a professional do a thorough check of the structure and the surrounding area for signs of pests.
If you've planned for the cost of renovations, you might be up for the task of fixing up a house that just needs some cosmetic work. However, if extensive repairs are required, it may not be worth the cost. The depreciation schedule is another method by which the property's age influences your budget.You may be eligible to claim tax deductions1 depending on the amount by which the value of your investment property and its furnishings (such as appliances, carpeting, etc.) depreciates over time.
Aspects of the Premises
Someone else will likely move into this house regardless of your plans for it. So think about the items that people normally seek for. Adding a garage, some more bathrooms, or a dedicated home office is a great way to boost your rental income. The property's design and layout also play an important role. Is it created with the needs of regular people in mind? Is there any window light? Tenants typically search for the aforementioned features, so you should consider them as well.
You should consider all of these aspects together before making a final choice, since you may have seen that many of them are interconnected (the property's location and age, for example, will both impact its potential for appreciation).
After you've done your homework and are ready to start investing, you can get more information about our current investor home loan rates by requesting a call back from your very own Home Finance Manager.