Buying an Investment property
Top 10 Criteria for Buying a High Performance Investment Property
Buying a high performance investment property requires very different skills to buying a home. Devoid of emotion, professional property investors’ selection criteria are focused entirely on returns for which they adopt a common checklist of criteria.
While there is no substitute for experience, you can dramatically improve the performance of your portfolio and minimise the risk of buying a dud by following a proven formula of the Top 10 Criteria for Buying a High Performance Investment Property.
The most astute professional investors are looking for one key criterion, “intrinsic value”.
“Intrinsic value” is found only in ‘investment grade’ properties that are located within a short commutable distance from ‘highly paid work’.
An acceptable commutable distance varies accordingly to the locality but typically it’s 10 - 20 minutes from work.
Highly paid work can be found in many locations, but typically the area with the lowest risk is the capital cities and its fringe because this where the state’s most highly paid lawyers, accountants, engineers, airline pilots, bankers etc are concentrated.
However, if you have an appetite for higher risk you can achieve extraordinary growth and yield in high income hotspots, most notably mining areas… provided you get in early enough in both in the property and mineral cycle. Get in too late or stay too long and you could lose all you’ve gained… and more.
High risk areas also include exotic locations such as Cairns, Sunshine & Gold Coast, and other holiday (fad) locations which are prone to boom and bust cycles.
One of the best performing areas, and one of the safest, has been inner suburban Melbourne. Investors have achieved extra-ordinary rental and capital growth from inner suburban St Kilda, Elwood, Prahran, Armadale, Toorak and Hawthorn, of which process that critical ingredient of ‘intrinsic value’
Once you’ve found the locality and let’s assume it is suburban Melbourne, you have to ensure you have the right neighbourhood and the building ‘blends’ comfortably into its surrounds as if it belongs there. You don’t want to get caught with an ultra modern 5 storey block of flats if the neighbourhood is known for its quaint ‘miner’s cottages’, it just doesn’t fit.
And make sure you look around the neighbourhood to ensure it adds value to your property; the last thing you want is an unkempt house next door with car bodies and rubbish strewn around the front yard.
To get that ‘blending’ effect, the property needs to be at least 25 years old… in fact the older the better is the rule within inner suburbs of Australian capital cities. For example an art deco grows substantial fast than a 1990’s or 2000’s apartment, particularly in more culturally minded cities like Melbourne.
The rule of thumb is, the lower the density the higher the appeal. For example that miner’s cottage is worth a whole lot more than a block of a hundred apartments, however a block 10 flats gives a better balance of growth and yield at an affordable price point.
Professional investors avoid high-rise properties because operational costs such as owners corporation fees for the maintenance of lifts, gyms, pools, spas and common areas can kill your cashflow. They are also very aware of the competition high density properties create in tough times for tenants and buyers.
Outdoors Outdoor areas add a lot of value; if it’s an upstairs flat a balcony adds a lot of appeal. A pleasant view over a garden, water or city skyline is a prized asset for the property.
Ground floor flats are fine if there is privacy and security but most prefer not to have anyone above them making the top floor the most desirable but don’t go above the 2nd floor it’s just too far to carry the groceries.
Title The property must be either Torrens title (house) or strata title (flat), avoid older title styles such as Stratum or company title and finally check the zoning, accept nothing less than residential 1.
Car parking Finally, check the car parking, you are looking for at least one on title car space, but carports and garages are keenly sought which serves to optimise long term growth and tenant appeal.
Plan & Living
Tenants and especially home owners love some space so make sure the floor plan provides for a feeling of spaciousness and practical use. The rule of thumb is a floor space of at least 50 square metres.
Professional investors are very, very careful with a building in poor condition. First they inspect the property for cracks, rising damp, plumbing, guttering, downpipes and other potential major cost items and will only consider buying if the ‘structural integrity’ is not compromised. There is no money in fixing the unseen.
Consider if there is room to add value. For example if you can renovate the kitchen and bathroom, paint throughout, replace the carpets and windows covering and maybe polish the floorboards you add a lot of value for not a lot of cost.
Amenities & environment
Buyers and renters will pay a premium for peace, quiet and convenience. The most keenly sought after properties are nicely located within an easy walk from cafes and trains and trams. Quiet tree lined cul-de-sac’s are the most popular followed by quiet streets with close to parks.
Finally, there is absolutely no point in ‘living in abject poverty trying to get rich’, so do your numbers and make sure you can afford the property you are contemplating before buying.
Get an independent property manager to assess the property for rental income. Then collate your outgoings and calculate your interest costs, don’t forget your stamp duty and acquisition costs: these are your expenses.
The calculation is quite complex so if you need assistance to calculate your pre-tax and your all important after tax cashflow position, give us a call at Investors Edge on 9822 3256.
If you can afford the purchase price and any negative cashflow then you are in a position to start the process of steps 1 to 9 above.
While there is no substitute for experience and the support of a team of advisors to assist you, these 10 top criteria for buying an investment property will certainly give you the best possible chance of selecting a high performance property.
Tools and Resources:
Investors Edge Finance has developed a range of tools and resources to assist property investors, if you would like to access any of them send an email to firstname.lastname@example.org
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