Top 10 tips for buying an investment property

If you are thinking of buying an investment property, consider the following:

1. What are your long term goals? Are you looking to achieve maximum capital growth or the highest rental return? Properties that achieve good capital growth don’t necessarily benefit from strong rental yields and vice versa. Generally, houses have outperformed units in respect of growth although there are signs that this is beginning to change in some Sydney suburbs. Units typically benefit from higher rental returns than houses.

2. What is your budget? It goes without saying that the amount of money that you have will ultimately determine the type, location and condition of the property that you will be able to afford. If you need to obtain finance to purchase a property, then you should consult with you bank or mortgage broker to find out how much you can borrow. Do this even before you start to look at properties.

3. Don’t become emotionally attached to the purchase. People often make the mistake of buying an investment property with the idea that they or their children will one day use the property. What may appeal to you or your family is not always the most suitable investment property. Similarly, people sometimes like to buy an investment property in the suburb that they know the most. However, you should have an open mind as to where to find the best performing investment property to meet your criteria.

4. Research. You will need to carry out a large amount of research to ensure that you are buying the right property at the right price. You do not want to make a costly mistake! Make sure that you have found out what the property was last sold for and when. Why is the owner selling? What are the most recent comparable sales? Where are the nearest shops, schools and transport options? Is there anything that adversely affects the property? The real estate agent should be able to assist you with all these questions.

5. Knowledge of the market. This includes both the resale market and the rental market. There is no point in buying a property that does not appeal to future purchasers or tenants. You need to have a good idea of what prospective purchasers and tenants will be looking for. Are they mainly young couples, families or retirees? Their needs and therefore their property requirements will be different. If you don’t consider your target market, you may have difficulties finding tenants or eventually selling the property.

6. Location, location, location. Whilst you may be able to renovate or rebuild a property, one thing that you cannot change is the location. Generally speaking, there is always more demand from both tenants and prospective purchasers for properties that are well located in close proximity to Sydney’s CBD, transport, shops, universities, hospitals and schools. As a rough guide, try to buy a property that is as close to Sydney’s CBD as your budget will permit.

7. Features of the property. In particular, what are the features which cannot be altered? Try to avoid:

• Properties located on a busy road.

• Properties that are overlooked.

• Properties that are dark inside. Generally people prefer properties where the main living area face north or north east. This is because in Sydney, the sun moves across the northern sky.

• Properties without parking.

• Properties with little or no external space.

• Properties that are small.

These are all features that are likely to impact upon the value of the property and could affect the long term growth potential of your investment.

8. Add value without overcapitalising. Overcapitalising is where the total cost of the property and any renovations exceed the value of the property. However, carefully planned renovations could add significant value to your investment. If you are intending to carry out any work to your investment property, make sure that you have a good idea of:

• The total cost of any renovations.

• Do the proposed renovations suit your target market – remember point 5 above?

• Are there any restrictions or prohibitions on carrying out any proposed works to the property?

9. Who is the purchaser? This may seem like an obvious question but there may be significant tax consequences and differences depending upon whether you purchase the property in your own name, your partner’s name or even through your company. You must obtain appropriate advice from your accountant and solicitor. Remember that if you purchase the property in your own name and you discover that it would have been better to purchase the property through a different entity, you are likely to end up having to pay additional stamp duty on the transfer of the property to the correct entity.

10. Consider using a buyer’s agent. A good buyer’s agent will save you a significant amount of time and eliminate stress by sourcing and researching the most suitable investment property for you. An experienced buyer’s agent will also work in your best interests to save you as much money where possible whilst giving you access to a wider selection of properties.