What makes a good investment property?

By Gerv Tacadena

A human hand holds a model of a house surrounded by dollar signs

A good property can make or break your fate in the investment space. Given that property is one of the most rewarding investment vehicles, it is a must for property investors to be in the know of how the industry works.

Previously, we set out some things you need to know before you jump aboard the property investment train. For this guide, Your Mortgage Australia will give you some tips to help you understand the market and kick-start your property investment portfolio.

Understanding the property cycle
A property investor should be knowledgeable of the current market conditions. As an investor, it is important to have a clear understanding of the phases of the property cycle in strategizing when you would make your first move.

The property market, just like any other market that can be affected by several economic factors, moves in cycles. It has three main phases: the boom, the upturn, and the slump.

The Boom
Lasting only for a short period of time, the boom phase is when rent and home prices hike. It is a sellers' market – properties are often sold for more than their asking price as buyers outbid each other. Access to finance is relatively easy, especially for first-time buyers.

During this phase, developers play catch up, establishing new housing supply which eventually creates an excess in the market. The oversupply dampens the boom phase and commences the slump phase.

The Slump
It all boils down to supply and demand – in the slump phase, oversupply causes vacancy rates to rise and rental rates to slowly descend. Contrary to popular belief, prices do not necessarily reflect a steep decline during the slump phase. While there is a chance of that happening, typically prices can just stay flat for a longer period of time.

Through the course of the slump, sellers can find it more difficult to sell their properties, as buyer sentiment becomes less enthusiastic and access to finance becomes more difficult. The slump phase is especially hard for new home buyers, who may find themselves struggling to meet their monthly repayments due to interest rate hikes.

Typically, the slump phase is the longest period in the cycle. Its duration is usually tied to the length of the boom phase.

The Upturn
The upturn begins after the market reaches the trough. Over this phase, prices and rents start to climb up again and investors begin to see shorter durations when it comes to property sales.

This is can be the best phase out of the three for investors, given that properties are affordable and returns are also lucrative. As the upturn phase reaches its peak, strong interest from investors and first home buyers will push the housing market into another boom phase.

When to make an investment?
You should be able to establish a strong set of strategies depending on the current phase of the property cycle. For instance, you can take advantage of the slump phase to purchase low-priced properties provided that you took the time to research the market they are in. One challenge you have to face in this scenario is the stricter lending rules which may either limit your choices or present you with costly options.

Picking the right property
The cardinal rule in property investing is to choose the property with the most potential for capital growth. The more likely the property will increase its value, the more lucrative it will be for you as an investor.

Unlike other investment vehicles like shares or bonds, the price of a property is not so easy to ascertain. Researching the market the particular property is massively beneficial in this regard, as well as consulting an industry professional like an appraiser.

You also have to consider what type of property you are going to invest in. Land, for instance, might not give you a steady flow of rental income but the value can appreciate quicker. On the other hand, a dwelling unit might help you dodge maintenance costs. While it offers higher rental yields, a unit's value does not inflate as much as a land property would.

One vital consideration when you are choosing a property is the demographics of your target tenants. If you are looking to invest near a university, would a landed dwelling be a more remunerative investment? Or should you invest more on dwelling units?

Knowing your rental demographic will help you in your investment decisions. As a rule of thumb, make sure that a property would appeal to at least two market segments. In the earlier example, if you are eyeing to invest near a university, you should ideally choose a property that would cater to students, student groups, and young professionals. When you're doing your research, you may want to investigate the publicly available demographic data from the statistics bureau to determine the demographic that takes the majority of the population in the locality of your choice.

In picking a property, it is also helpful to ask yourself: "Is this the type of property I would like to live in?" If the answer is yes, then you certainly picked the right property to grab.

What makes a property attractive to prospective renters?
While you own the property, it is important that you give the tenant a clean slate to make their own mark. A simple thing as giving the walls of the house a neutral colour can increase the chances of getting a lot of inquiries. If the tenant wishes to change the colour of the walls, see if you can come to an agreement on the matter.

You will also want to make sure that each room maximises the space. You may need to make some internal renovations or hire a gardener to update the landscaping outside the house.

You should be able to put yourself into the shoes of your potential tenants. Ask yourself if you would be happy living in the property, and you will have a good idea if your prospective tenants might be, too.

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