Buying an investment property is not an easy task.
And things get trickier when you have to choose a location.
Finding the right location for your property can be crucial to the success of your investment.
Why is location important for investment?
The location of your investment decision can determine the types of tenants you’ll get.
If you want an investment property that will gain high rental yields for the foreseeable future, then you’ll need to choose a location that is popular with tenants.
If you’re opting to buy vacant land, you’ll need to choose a location that will increase in value in the future as you won’t be earning any rental income from it for a while.
How To Choose A Location For An Investment Property
Here are some tips you can follow to get started on choosing where to buy your investment property:
- Invest where you know: Consider buying in markets you’re familiar with first so you spend less time researching areas or suburbs you’re not familiar with. This also means you have an intimate know-how of the types of tenant residing in the area. If you’re considering buying interstate, we recommend hiring a buyers’ agent.
- Get a team ready: Get in touch with a buyer’s agent of the area you’re looking to invest in. It’s beneficial to go with the local buyer agent as he/she would have intimate knowledge of the area. Talk to the real estate or buyer’s agent to find out what people liked or disliked about the property or location. You should even have an accountant on your team to give tax advice.
- Empathise with your tenants: Go for locations that tenants favour, instead of just what looks good to you. If the goal of your investment property is to earn a strong rental income and minimising vacancy, then opting to choose locations that tenants prefer is a must.
- Stay updated about development changes: Find out if any infrastructure improvements might happen in the area. This might determine the type of tenants and the value of the location in the future. Get in touch with the local council to check if there are any planned developmental projects. Talk to the locals to get their feedback on how they feel about those projects.
- Desirable features for tenants: Look into the features that are desirable to tenants like a garage, swimming pool, etc. While renters in Melbourne need transportation facilities, the same principle does not apply to renters in Perth or Adelaide who prefer to drive. For them, a garage is more important than having good public transport.
- Costs involved: Take into consideration the maintenance costs of the property. If you’re buying an older property, then you might need to set aside some funds for renovations or repairs.
- Vacancy rates: Review the latest vacancy rates of the location you’ve chosen. It’s good to invest in areas where vacancy rates are low as it means that your property will not be empty for long between tenants. A location with high vacancy rates makes it harder to sell it in the future. Information on vacancy rates can be found online on Corelogic and other websites.
- Compare sales information: Check the recent sales figures for the locations you’re buying in. You can get sales data on how the property is performing online, or by talking to real estate agents and buyer agents. Look into the average prices of the surrounding areas. If there are huge margins of differences within the area, think twice before investing. If the prices are comparable, then it’s a safer bet.
- Access to amenities: The proximity to amenities like shopping centres, schools, gyms, etc. determines how much demand there is for rental properties.
- A building inspection is a must: Always do an independent pest and building inspection. An independent inspector will provide a detailed report about your property.
- Take note of scarcity, demand and supply: The availability of rentals around the area determines the demand and supply. If your potential location is rife with rental properties, the oversupply might lower your rental yield. If it’s too scarce, then the rent might be high, but the tenant pool is limited. You have to choose a location that strikes the perfect balance between the demand and supply of rentals.
- Decide on your investment strategy: Are you looking for capital growth potential or choosing a property to get the benefits of rental yields? If you’re looking to earn from rental yields, then the location of your investment property should be one favoured by renters.
Take A Look At The Broader Picture
Macro- and microeconomic factors also have an impact on where you want to invest in property.
Look at the information related to the state and then home in on the suburb, neighbourhood and street.
Macro factors include population growth, employment and infrastructure investment, while micro factors include amenities and transport.
Let’s take Melbourne as an example. Melbourne experienced population growth of over 2% in 2018 with a demand of over 110,000 new jobs.
There are plans afoot to build over 1.6 million dwellings by 2050 to accommodate the growing population and employment opportunities.
What To Avoid When Choosing Investment Property Locations
While there are a plethora of things you can do to ensure that you’ve invested in the right location, here are some things you should keep in mind.
- Don’t get your emotions involved: Getting emotionally attached to the property will cloud your decision. Use analytical data and the knowledge of experts and local people instead of going with your heart. Going to look for a property when you’re in a bad mood is a disaster too.
- Don’t buy a property with cheap strata levies: This is an indication that the building might not offer facilities that tenants want.
- Don’t go property hunting or to open houses alone: Get a team of experts to go with you. These experts don’t always have to be a real estate agent or buyer’s agent. It can be your family or friends who will point out things that you were not aware of.
- Don’t lowball the figure: If the investment property is really favourable to you, don’t offer a low figure, as someone else will buy the property before you.
- Try to avoid buying off-the-plan units: While these units might be cheaper to invest in, you’ll have to consider that these properties are usually clustered together and built by the same developer. There’s just too much competition to get the right tenant into the property.
- Buy in the location that suits the tenants, not you: You have to take the requirements of the tenant when you’re choosing a location. Do not make a decision to buy just because you love the location. Your investment property must be one in which you want your ideal tenant to reside in.
New Unit Or Established Property?
While investing in either a new unit or buying an established property have their benefits, investors are known to prefer established properties to new ones.
By buying an established property, investors benefit from:
- Insights and data like comparable sales figures, vacancy rates, demographic profiles, types of tenants, etc.
- Adding value to the property by renovating and refurbishing and making it more appealing to tenants.
- Having a property close to a CBD as newer properties are situated on the outer suburbs due to unavailability of land. However, in some cases, new apartments can also be located close to a CBD.
However, investing in a new property is not without its benefits:
- Investors can get tax write-offs and take advantage of depreciation benefits. You can get tax breaks on rental advertising costs, council rates, land tax, etc.
- You are investing in a property that is attractive to the tenant as it has modern amenities and smart appliances that tenants currently want. This might help you get a tenant who is willing to pay a higher rent.
- New properties generally have lower maintenance costs, and in most cases, if anything needs renovation or replacement, it can be done easily.
- Stamp duty
- Conveyancing fees
- Legal fees
- Search fees
- Pest and building reports
- Council and water rates
- Land tax
- Property management fees
- Repairs and maintenance
- Agent fees, and more.
- Get a deposit of at least 20% of the property value ready to avoid paying Lenders Mortgage Insurance (LMI). If you own property already, you can use the equity from it as well. We also have no deposit investment loan options available.
- You will need at least three months of genuine savings in your account. This is a good indicator to lenders of your ability to save and manage your finances.
- It’s always better to have a good credit score on your file.
- You will need to be employed and earning a good income to prove to the lender that you can afford the mortgage.
- Try to reduce your expenses, as they do affect your borrowing power.
- Limit the number of credit cards you used and cancel any unused credit cards.
- Make sure you’re making timely repayments on your commitments, like car loans, and buy now pay later services like Afterpay and ZipPay.
- Getting a pre-approval for your investment loan so you know how much you can afford. Once you know your budget and how flexible you can be, you can narrow down your options on where you can buy.
- We can even provide you with property reports and suburb reports since we have access to CoreLogic RP data and AMV.
- Once you’ve decided to buy the investment property, send it to your mortgage broker so they can help you get your financials in order.
- Use our investment property calculator to predict your weekly cash flow for your investment property.
- If you’re thinking of turning your home into an investment property, the rental income has to be declared on your tax return. Furthermore, the cost involved with an investment property, like advertising for tenants, maintenance, etc might be tax deductible. However, when you sell your property, you need to consider capital gains tax and real estate agent fees.
Apartment Or House – Which Should I Choose?
While apartments are often perceived as a good option for first time investors, due to its lower investment costs, there are hidden costs involved that might reduce the return on your investment.
Apartments usually come with strata title or community title, meaning you’ll have to pay body corporate fees.
Another thing to note is that since you’re the landlord, you are responsible for managing and renovating the apartment.
You can hire a property manager for this, who will look into the maintenance of your apartment, and also help you find tenants if the apartment is vacant.
It’s best to find a property manager that is from a location you’re looking to invest in, and choose one that is not bogged down by too many properties to look after.
However, as the apartments are small, and can only accommodate a few people, it is expensive for one person to afford.
You’ll also need to compete for tenants if there are many apartments located in a close radius, meaning the vacancy rates might be too high.
What about investment homes?
Buying an investment home might seem like a good idea, especially if you want more freedom to manage the property and avoid the corporate fees.
However, if you’re buying a home in a metropolitan city, due to space limits, the housing developments might be located farther away, and the amenities that tenants are looking for are not close by.
Whether you choose to buy an apartment or a house for your investment, it all comes down to the demand for the property in the location.
The underlying fact is that you should choose either investing in an apartment or house according to the ideal tenant you want to rent to.
What are the costs involved in buying an investment property?
There are various costs associated with buying an investment property.
You can use our property purchase costs calculator to work out an accurate estimate.
How Do I Qualify For An Investment Loan?
Here’s how we can help
Selecting where to buy your investment property is a paramount decision, and we can provide you with the tools and information to help make the decision.