There are several options when it comes to buying investment properties. The most common ones are residential dwellings that can be rented out. Other choices are commercial properties of various kinds or larger blocks of vacant land that can be subdivided and sold off individually – with or without the home. For investors with little experience it is usual to start off with a residential dwelling, but the way is still fraught with danger, so here are some tips to guide you.
The amount of land is important. When it comes to a house on the proverbial block of land, you get a good ratio of actual land to dwelling. This is important because the value of real estate goes up and it is there all the time, while buildings can be damaged or lost completely through fire or flood, or get old and so need repair. If you buy an apartment in a block of high-rise flats, the amount of actual land you are purchasing is very small and so represents only a small fraction of the cost of your investment. Besides this, if you buy a high-rise, the area will have been approved for that kind of development and so others in the area are likely. This reduces the likelihood of an essential element for good renting prospects; limited supply.
Population growth is also important. You should select an area where there are plenty of people and likely to be more in the near and far future. Rural areas only have a small pool of renters. Some cities or towns are dependent on only one or two major employers and if these closed down, people would be forced to leave to find other work. And you would then find it difficult to rent out your investment property.
We have all heard about location in regards to property, whether for investment or not. When there are good shopping facilities, public amenities, schools and public transport more people are likely to move to the area. Having a quick road into the CBD is also an advantage. If there are also things such as tourist attractions like a beach or great restaurants in the area then all the better.
Renter affordability. When someone rents a house they should not have to pay more than 30%-40% of their income. When working out what rent you will need to charge to make a profit, it should not exceed 40% of the average monthly income in that area. 30% is even better. This means that really high end properties are not such a good idea for investment because those executives could easily be laid off in a recession. And neither are the really low-end ones, because there could easily be long periods of time without tenants and the homes will most likely need a great deal of money spent on them in repairs.
Affordability for the investor is just as important. It will cost you quite a bit to hold an investment property. You have the mortgage costs, the insurances, tax, council rates and many other costs. Make sure your investment property covers these and brings in a little profit too.
Dex has been in the Perth financial planning industry now for over 8 years. He works in a team of finance experts that specialise in financial planning, superannuation, wealth management and tax advice. So keep an eye on his articles for some great tips and advice.police