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How to recognise a good investment opportunity

Buying an investment property is easy. Buying the right one can be a little trickier.

People will always need a place to live, and right now, the stars are aligned for investors who want to make money meeting that need. The market is doing exceptionally well, buyers are flooding back in and rates are remaining at a historical low- prompting new-timers investors to consider the idea.
But it’s not an easy venture and simply buying an investment doesn’t ensure profit and the early retirement we all dream of.
So what do you look for? How can you be sure that the investment you buy will be a good one?
We’ve asked Peter Peard, Peard Real Estate’s CEO and long-term investor to answer some common investor questions.

Buyers Agents- Do I really need one?
If you are not completely confident with the buying process, a buyer’s agent can save you a lot of time, effort and money. Everything from the research of properties, value assessments and price negotiation can be done for you. A good buyer’s agent will also help ensure that you don’t buy an overpriced property.
But of course, with everything, expertise comes with a fee. This is something you will need to consider.

What makes for a better investment, units or houses?
The decision depends on what you’re aim is. Is it to gain cash flow from rental yields, or capital growth?
The idea of “growth” is generally in the land and its development potential which is something that may not apply in the case of a unit, especially one under a strata title.
You need to be aware of the fees and potential constraints when it comes to units. Strata laws can be tough and there may be little you can do to fight them proving renovations and expansions to be almost impossible.
A free-standing house on a large block of land can have massive development potential and therefore tends the be the more favourable option in many cases.

In saying this, you need to make money on the property to keep it. There is not much point in having a house on a massive block that just sits there and does not attract any rental attention because you will struggle to keep the property. The trick is to buy a property which is appealing to potential tenants now, but has potential for additions and subdivisions in the future. This way, the house will generate income whilst its value grows.
Consider the numbers when purchasing your investment property- median house prices and yields most importantly.

It’s also crucial that you think with your head and not your heart. What you like or could see yourself living in, is not necessarily what would make for a lucrative investment.

Should I renovate?
If you think the cost of the renovation will add genuine value and profit when the property is sold, then yes.
The trick is to know what to renovate. Kitchens and bathrooms seem to contribute most to the value of a property, but be careful not be caught out with spending too much on unnecessarily renovations that may not add any significance.

Remember that in any given neighbourhood, the worth of the entire area will affect the worth of your property. If you have a state-of-the art house in a mediocre area, the value will inevitably go down. It’s a good idea to know what the other properties in the neighbourhood are like and whether yours measures up or sits above the rest.
Put simply, and speaking in terms of “value”-  it’s better to have the worst house in  the best suburb than the best house in the worst suburb.

How much of my income should be taken up by mortgage repayments?
The answer really depends on your individual budget constraints and on-going costs.
A stressful situation would be spending more than 30% of your income on housing repayments; so ideally, you should be under that percentage.
Before you consider purchasing an investment, you need be very aware of what you can and can’t afford.
Try putting your expected mortgage repayment into a savings account for three months. This will help you gauge if you can make the repayments and you will come out with savings at the end of the exercise.

How do I find a good capital growth area?
“This is always a tough question to answer. One thing I always say is understand the relevant data. RP Data can give you information on average rents, property values, demographics and suburb reports. Look at the transport amenities in the area, economic developments, near-by employment “hubs” and any new major developments in the pipeline for the area that could see demand for a property there rise.

When to sell

Ideally, you need to think ahead of the other owners in your area. That is, taking advantage of a rising demand for your investment suburb before the other home owners do. Once everyone is on the same page (selling), supply will rise and prices will start to go down.
It important to always keep an eye out for signs of buyer interest.