Are you wanting to enter the property market but don’t know where to buy?
There are some key features that you need to know when looking to buy a rental property. Identifying the best location is one of the most important considerations when choosing the right property. By now you would have considered the opportunity cost to invest your surplus cash in shares vs property. Now you can decide on the individual factors when comparing rental properties to buy. There are a number of factors that you must consider when investing in rental properties namely:
Four Key Factors to buy rental Properties
- Budget – The amount that you are wanting to spend
- Choosing Location – Where are you going to see growth potential?
- Best location to buy – Where are the investment grade properties?
- Property Type – Choosing the right property for the area
1. Budget for your property
Firstly, choosing the amount that you would like to spend is largely out of your control. This is because it is based on your income. Those owners or tenants that have highly skilled jobs are more likely to afford the higher rent. The reason is that they have scarcity within their industry and therefore command a higher salary. As their income is higher they can afford a higher price point for the property. The budget that you can afford can also impact the property rental yields that people can expect to pay. You have the option to earn money online through a side hustle.
To borrow more, you are either going to need to get promoted, switch jobs or take on another job. This in turn will increase your borrowing capacity. A crucial point is that borrowing capacity determines the level of income that you can afford to service the debt. Property yield is an important factor when choosing the right property. The cash flow that you receive can assist with the repayments on the debt. Those that cannot afford to service the loan, as usual, are a result of high repayments. Therefore, taking on too much debt you can quickly come unstuck on your property journey.
2. Choosing a Location
The location that you choose largely depends on where you see growth potential. The reason is that you want the property to increase in value. This will give you not only a rental income but also capital growth. The inner-city suburbs and gentrified areas are more likely to increase in value in comparison to the outer cheaper suburbs. There is a higher demand for properties with access to great amenities. For instance, suburbs where there is great access to public transport, parks, schools and shops. The areas are considered to have an owner-occupier appeal. This is a price paid for lifestyle appeal pushing up the prices for houses in the area. People are willing to spend more to acquire their dream home.
3. Where is the best location to buy rental properties?
People who are buying/renting in fringe city suburbs may not be able to afford a higher price point. Therefore, the overall house prices may not increase as quickly as those suburbs. This would mean that buyers are going to lose out in the long run. Regional property and small capital cities may not provide the growth that investors are chasing. The investment-grade suburbs within these cities are more likely to perform well than those smaller regional towns. Economic growth that includes increasing wages and salaries can help drive prices up.
Strong historical capital growth can be a good indication of performance over the long term. However, the disclaimer is that past performance doesn’t indicate future performance. In saying that, it can be a point of comparison to bench march against other suburbs. Core Logic Data can be a great tool at your disposal to search historical prices. The RP Data tool may cost you to access however can provide a great source of data to compare properties. You also have the option to engage a buyer agent. Be aware that they can charge a high commission for the services.
What type of property?
Location is vital to get right however choosing the right property for the area is also a key factor. Buying an investment property as an apartment, unit/villa, townhouse or house can impact the rental returns and capital growth. Not every investor is chasing growth as some are geared more towards creating cash flow. Therefore a higher rental yield may be more appealing to them than capital growth. High-rise apartments within the CBD have a tendency to battle with structural defects. This is due to builders trying to finish projects quickly with cheaper materials for a greater profit.
Whether you are opting for the spacious home on some land or that inner-city townhouse choose the location carefully. Bigger property, away from the city, may appeal to families or tenants who want animals on their property. This is a drawcard for tenants and buyers for this type of property within this area. Therefore these factors could increase the property value compared to that of an apartment-style living. Investment-grade properties can take on different interpretations. This could fit the category of a house with a large land component or a townhouse close to lifestyle amenities.
Summary Rental Properties
The value in properties is said to comprise 80% based on its location alone. Therefore choosing the right area for growth and capital appreciation is important. Those suburbs with an owner-occupier appeal are going to perform stronger than those without it. Suburbs that don’t have the same access to shops, transport and commute times are going to be at a disadvantage. Budgeting for a property is the other important aspect of purchasing a property. A mortgage savvy investment broker can assist with this process. Choosing the right property requires an eye for detail. So do your research and aim for long term capital growth and a new passive income stream.
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