What to look for in an investment property
Jun 26, 2018
When it comes to buying an investment property it can seem truly overwhelming. There is so much information available, but much of it is conflicting.
What may seem like a goldmine of capital growth may actually turn out to be a lemon that sucks your bank account dry.
And there’s plenty out there willing to offer ‘professional advice’ but how accurate is it? What is their agenda? Sometimes if you rub the glistening gold hard enough and you uncover rusted metal.
Seeking truly independent advice is one of the first things RiskWise advices.
Following are some tips on what to look for when purchasing an investment property to help you minimise the risks:
Areas where there is strong population growth clearly also show a growth in property prices. Owner-occupier demand, combined with a renewed increase in investor activity and a limited supply of properties suitable for families, is likely to lead to dwelling price growth. Look for areas where there is likely to be high international or intrastate migration. In fact, international migration has played a major role when it comes to price growth.
Sustained economic growth is strongly correlated to solid capital growth across the property market, particularly in a low interest rate (i.e. low economic growth) environment. Economic growth is also strongly correlated to population growth, and vice versa.
So it makes sense to purchase in an area where both population and economic growth are strong. Factors such as migration (overseas and interstate), employment opportunities, affordability and lifestyle all play a role in the housing market.
A strong employment market with many employment opportunities triggers stronger migration, higher wage growth and stronger demand for housing. On the other hand, areas that suffer from poor employment opportunities experience poor and often negative property capital growth.
The bottom line is if population rates decrease (eg because of low unemployment as is the case in the post-mining boom regions), demand, and therefore returns, are likely to stagnate or decline.
Look for areas that are not oversupplied with product. It has been shown that housing supply (whether too much or not enough) is a contributing factor to the property market.
Undersupply of houses, eg in the inner and middle rings of Sydney and Melbourne, has significantly driven prices up, further increasing their unaffordability.
On the other hand, areas with a large number of units in the pipeline, alongside an abundance of dwellings building approvals, suffer from poor and often negative capital growth.
The ‘dwelling supply to population growth ratio’ is a useful measure to assess supply and demand. The metric provides an indication of the number of dwellings required to service population growth and therefore provides an indication as to what changes in capital growth property investors can expect. For example, a high ratio indicates that there is an increased likelihood of dwelling oversupply.
The risk of oversupply:
It is worthwhile to check out the number of dwelling building approvals in your chosen location as this helps create a forward-looking view around supply and demand.
In many cases, the supply of houses in a particular area may be greater than what the market can absorb, often leading to poor capital gains and rental losses.
It is particularly of concern when it comes to the number of units in the pipeline. In many cases, the supply of units in a particular area may be greater than what the market can absorb, often leading to poor capital gains and rental losses.
However, it must be noted that an increasing unit supply can also be an indication of strong economic conditions in a particular area which means high supply should not be analysed in isolation of other factors.
Location, location, location:
Dwellings in affordable areas with good access to the city typically deliver strong growth rates, particularly in unaffordable markets such as in NSW. In addition, houses consistently outperform unit price growth across Australia.
Government spending or expenditure includes all government consumption, investment and transfer payments in each state and territory. It provides a good indication (in tandem with private new capital expenditure) as to employment market changes, wage growth expectations and spending initiatives, all likely to have an impact on the health of the property market.
Type of dwelling:
As noted above, houses have consistently outperformed units as there is higher demand. This is generally because they have more appeal to families looking for three bedrooms and a yard.Meanwhile, investment in units is typically higher risk largely due to a high supply and increases in lending restrictions. Off-the-Plan units carry additional risk.
Auction Clearance Rate:
This is the percentage of properties on the market that have been sold and it is worth having a look at as it provides a good indication as to the current market conditions.
A low clearance rate would typically indicate a strong buyers’ market and a high clearance rate would mean a strong sellers’ market.
The rental income is calculated as a gross percentage, before expenses are deducted. Median rental returns across a particular area give a broad indication of the rental potential in a particular market. For example, a high rental return would indicate a property market in high demand.
RiskWise believes the most important tool you can use when buying a property is research. Do your homework and learn as much as you can about the market in the region you are interested in and proceed with caution.