4 essential ‘P’s’ of investment property selection
This article is owned and published by Smart Property Investment.
The saying goes: you make profits in property when you buy, not when you sell. While you can obviously boost rent and value via renovation or redevelopment, there’s no denying that buying well is crucial.
So, what are the principals of procurement that give the best chance of yielding a stellar outcome?
I’ve found these four elements — or what I call the essential “P’s” of property investment — are key to success.
Let’s be clear from the start — unearthing the right property in this instance doesn’t refer to a home you’ll fall in love with.
I’m talking about an investment, so make sure the real estate you’re considering will fulfil your financial needs, not your emotional ones.
For starters, the right property should realistically achieve above 4 per cent in rental return. This will cover repayments and most outgoings.
I also seek a good size land component of greater than 500 square metres. There are two reasons for this. Firstly, land appreciates in value. Larger properties have good owner-occupier appeal and will make an emotional connection with the next buyer.
Secondly, I want to buy a property with potential for further development that will help boost value and/or increase rental income. For example, the right property could allow you to add a granny flat for $150,000, which will increase your rental return by $400 per week. No need to buy a whole new investment asset — simply adapt the one you have. The right property is one that you can add value to and generate more income.
I also look for some key features in the property that I know will appeal to both tenants and owner-occupiers. This means you’ll attract a premium rent for the home, often $40 to $50 per week more. You’ll also achieve a faster sales result at a better price in the future because owner-occupiers will form an emotional connection to the home.
These appealing features include a good at-home workspace for remote employment. You should also have solid, lockable covered car accommodation.
The property should have a good yard space, as mentioned above, but also nice-sized separable living areas. Both tenants and owners appreciate adequate break-out spaces in family homes.
This is the bit about “Location! Location! Location!”, which is an absolute imperative in asset selection. The right location will mean proximity to amenities across several tiers.
The area should be readily accessible, and not just via road but along public transport routes as well. The property itself must be within walking distance of a bus stop and at least within a short drive of a park ‘n’ ride train station.
Then there’s infrastructure such as retail outlets and other facilities like professional services and lifestyle options. I also like to see locations within solid school catchments to help attract family buyers.
Another factor that helps is a ready tenant base. If a home is near employment hubs or major operations such as hospitals or universities, it often bodes well for renter and owner-occupier demand.
This brings me to the importance of a location’s statistical analysis too. Investment is all about getting your numbers right, so the suburbs I choose must meet certain metrics.
First up, I love looking at rental vacancy rates. The lower the vacancy rates, the better the capital growth potential. Most of the time, a 2 to 3 per cent vacancy rate indicates a market in balance where demand from tenants is being met with an adequate supply of available rental properties. Right now, across many areas, vacancy rates are trending sub-2 per cent. In fact, I’ve seen locations where there are sub-1 per cent vacancy rates. That’s a sure sign demand will drive up rents, which is good news for landlords.
I also like suburbs with high owner-occupier to renter ratio. Owner-occupiers tend to stay in areas for longer and spend more on their properties. They’re also drawn to locations with great facilities and infrastructure, as well as good proximity to employment and town centres. This is important because five to ten years down the track, it’s owner-occupiers who will pay an emotional premium for a property.
Then there’s stock on market. If there’s limited property available for sale in an area relative to demand, prices are likely to rise. We saw this on a macro scale during the pandemic. Owners who were planning to sell decided to hold off listing their homes. Despite buyers still being keen to acquire, prices rose as they competed for limited listings. Checking stock on market at a local level is a great way to track an area with potential.
The other stats I seek in a location include high auction clearance rates and below-average days on market. Both point to strong demand credentials for a suburb.
There’s a good reason people use buyer’s agents — we have the skills to identify good value and negotiate the best possible price outcome for our clients.
I believe you should always buy a property for below market value, and there are ways to achieve this if you know how the game is played.
Typically, I’ll save my clients at least $20,000 to $30,000 on a purchase. By the time my clients are contracting, I’ll be aware of a similar property that’s sold in that same location for far more. My clients will now have an equity buffer from the day they take possession.
Auctions in hot markets are great examples of when people overpay. This is particularly the case with young, first-time investors who don’t understand the auction process and can be caught up in the excitement of the event. The result is they pay too much for a property just to beat out the competition. Most will justify their decision at the time, reasoning they’ve been approved for finance to a figure well above market value, so it’s okay for them to keep bidding.
Well, just because you CAN buy something doesn’t mean you SHOULD buy it.
It’s important to assess the market value of the property. Look at comparable sales, check suburb median prices and consult with independent experts.
A further advantage to using a buyer’s agent is their ability to source off-market and pre-market listings. These put you ahead of the competition and deliver a chance to secure the investment at a below-market figure.
Being comprehensive with due diligence around price will potentially save you wasting tens of thousands of dollars.
Let me be clear; I’m not suggesting buyers solely try to pick the bottom of the market. While it is handy to buy when property is relatively cheap, I subscribe to the truism that time in the market is far more profitable than timing the market.
So, what I’m referring to is buying at the right time for the investor involved. If you are at that stage of your investment journey when you have the means to buy an investment and the ability to service the loan, then the time is right.
And don’t let market conditions put you off. Late last year, when the market was super hot, I had an investor client who had a $450,000 borrowing capacity, but she was convinced she wouldn’t be able to afford anything decent.
However, I knew there were plenty of investment opportunities below the $500,000 price point. She had the means to secure something and it suited her portfolio strategy to acquire. In her case, the time was right; she just needed help unearthing the asset.
Of course, tracking market performance is important. I encourage any buyer to be aware of some key statistical analyses about their area of interest. This includes factors such as the percentage growth of median rents and sale prices. These indicate peaks and troughs in the market, which means you’ll be up to date on the local price cycle. Other analyses around the ripple effect of capital gains in major population centres can see you purchase at an appropriate time too.
These four principals are crucial to growing wealth. Make them the bedrock of your investment decisions, and you’ll be well on your way to building a portfolio of excellent assets that deliver above-average returns.
Colin Lee is the founder and chief executive at Inspire Realty and a member of the Property Investment Professionals of Australia (PIPA).