Buying an investment property can be a great way to create wealth and build up a healthy nest-egg for retirement. Yet the biggest problem many people face is choosing the right investment property to suit their financial needs.
What works for one investor’s strategy may not work for your individual situation, so it’s important to choose the right option that propels you towards achieving your financial goals. The biggest challenge is trying to determine which property will be the right one to add to your portfolio. Here are some tips to consider.
Capital Growth
Scarcity and demand drive property values, so if your goal is to hold an investment property over a period of time for the future capital growth look for properties in highly-sought after locations. Inner-city suburbs near the CBD or areas near the waterfront are always in strong demand with buyers and renters.
Likewise, up-and-coming suburbs with new or upgraded infrastructure can also hold opportunities for capital growth. The key is researching your market before making a decision about which property to add to your portfolio.
Rental Return
Lots of investors focus strongly on a property’s potential rental return when deciding which one to buy. It’s also common for many real estate agents to display a home for sale along with a figure representing the gross rental yield.
However, before you base your investment decision on an attractive gross rental return, take the time to also calculate the net return yield as well. Some properties may have higher expenses than others, which can affect the cash flow you thought you might receive, so it’s important to factor in all the variables before you make a decision.
Location
Almost every homebuyer knows the old adage ‘location, location, location’. The problem is that what one person finds appealing in a location might be unsuitable for another.
Take a moment to think about what your goals are for your investment property before choosing a location. If your goal is good capital growth, consider an area close to the CBD in any capital city or with stunning views over the beaches.
On the other hand, if your goal is to seek a good rental return, consider looking for homes in the suburbs in close proximity to public transport, shopping centres, schools, parks, and other amenities that help drive tenant demand.
Of course, there may also be undesirable locations you might want to avoid. Properties on busy main roads or beside railway lines or under flight paths tend to be less desirable for tenants and future buyers.
Median price range
When you’ve determined a likely area you’d like to buy in, do your homework and know what the median price range is in that suburb. A part of your homework should also include checking out what properties are within the higher and lower ends of the same market.
If you’re buying an established home, you’ll know whether the property represents good value, healthy rental yields and the potential for future capital growth. If you’re building a new home, you’ll also know whether the cost of land plus the cost of construction is likely to result in future capital growth, good rental yields, or whether you’re overcapitalizing in a particular location.
Type of property
The type of property you choose can have an impact on your financial strategy. Whether you choose a family home in the suburbs or a high-rise apartment in the city or a low-maintenance townhouse on the waterfront, each type of property will have its pros and cons to take into account.
Buy or build
Many investors find that buying an established property is an appealing option, simply because they can begin generating rental income right away. However, other investors prefer to construct a new property for the increased tax deductions and capital depreciation available on new homes.
There are definite advantages and disadvantages to both buying established or building new, so be sure you’re familiar with your options before you make a decision.
Financial strategy
No matter what property you’re considering to add into your investment portfolio, it’s important that it propels your strategy towards achieving your financial goals. Take some time to work out your own investing strategy and know what you hope to achieve by buying an investment property.
Speak to your accountant and discuss your financing options with a good mortgage broker. The right property to add to your investment portfolio is the one that is most likely to help you achieve your individual wealth creation goals.
