If you’re in the market for an investment property, then you’re probably asking yourself the same type of question: how much can I afford?
But there’s another, more important question many rentvesters ignore – and it’s one that arguably has more of an impact on the day-to-day management of your property:
What kind of tenants can you afford?
I don’t just mean how much rent you can charge.
Remember: when you own an investment property, you become a property manager whether you use a real estate agent or not. Many buyers don’t think about this when purchasing a property, and they get a shock when they realise that owning an investment property is a job that requires you to be “always on”.
If your home is in a nicer area, with some more modern amenities, you’re likely to attract tenants who will treat your property well and provide you with a better experience, with fewer problems.
But if you try to scrimp as much as possible on your property by buying in a worse neighbourhood you’ll potentially end up spending a lot more time fixing problems.
Personally, I always think property is a good buy. People need homes and owning a good piece of land or property is a fantastic decision that can pay off in the long-run.
But you need to be careful and consider what it means for you to own an investment property, and what it means for you to become a “property manager” – someone who is going to spend a fair bit of time making sure the property is in good condition and the rent is coming in.
So as a potential property manager, what questions do you need to ask yourself?
Why are you buying this property?
If an investment property makes sense for you, think about your own financial goals and lifestyle.
Do you want lower risk, with a potential higher gain over the long-term on your investment? Perhaps a capital gains strategy is suitable for you. (The rent is unlikely to cover the costs of the mortgage and other holding costs so you’ll need extra funds to hold the property)
Do you want lower risk, but an ongoing rental return with a potential smaller pay day when you sell? Perhaps a positively-geared strategy is the way to go. (This strategy should give you a small ongoing income so you don’t have to keep digging into your pocket every month to hold the property but you are likely to get a smaller payday when it’s time to sell as opposed to the above capital gains strategy)
Both are typically long term strategies.
What do you need consider?
When it comes to buying an investment property, you need to keep one thing in mind: you’re not buying it to live in it. That’s actually a good thing because it means you can be less picky and focus on the numbers rather than your emotions.
But owning an investment property means you become a property manager, so you need to look at everything through that lens.
Here some key topics you should think about:
Think about the tenants you want in your property, and what tenant issues are likely to occur as a result.
Some properties attract short term tenants which means you’ll have to find new tenants all the time. While on the other hand some might receive slightly less rent but are able to keep tenants for the long term so you might only have to deal with a vacancy cost every few years.
Here’s something to keep in mind: make sure your property does have a target market when it comes to tenants.
I once managed a four-bedroom property on the Central Coast in New South Wales. It was absolutely perfect for an older couple except for one major problem: it had 10 steps to get up to the front door!
For this reason it made it really hard to find suitable tenants. We had to reduce the price significantly.
This is another good reason to look at the demographics in the area – are your desired tenants attracted to the area? And another thing to keep in mind – are your desired buyers looking in the area as well? Remember, property investment is usually a long-term strategy, so think about people who might actually want to buy up in that area in a few years’ time.
Owner occupiers take up the majority of the market so think twice before trying to sell to the next investor. Just something to keep in the back of your mind.
A good area attracts better quality tenants – makes sense, right? But you’d be amazed how many investors choose to save money in sketchy areas and end up worse in the long run.
Even if you have an awesome house in a terrible area, you’re still exposing yourself to the same types of tenants.
You might also find you significantly reduce your potential tenant pool. For example, which nice families who always pay the rent and keep their homes immaculate want to live in a dodgy area? Not many.
The type of property
I like houses. They’re more dependable, on bigger lots of land and they retain their value over the long-term. Even older houses retain their value as they’ve stood the test of time. Personally I love a good solid brick home that’s been around for 30-40 years.
Of course, that’s a problem as you get closer to the CBD in capital cities. They’re hard to get for your money, and if you’re rentvesting then you typically want to live in those areas and buy out where you can afford.
So buying a house is often a better way to go, but think about the responsibility: a bigger block means more upkeep, more opportunities for things to go wrong – especially if you have a swimming pool or a large number of appliances to look after – and the amount of time you spend fixing those things digs into your rental yield.
Be sure you’re able to handle those types of issues when they come up.
Side note: I’ve very rarely seen a swimming pool add rental value to a home. Not many tenants want a pool – they’re way too much upkeep.
Now, what about units?
There isn’t any problem with a unit…as long as it has value. Avoid high-rises with hundreds of apartments as you’ll just be one in a sea. Instead, look for units that are on a block with less than eight properties, and make sure it’s detached if possible.
If you can’t buy a detached unit, many have thick walls between them so your tenants will still be able to have their privacy.
When your tenants come home, they want to feel like they can relax and aren’t overlooked, or locked in tight with other people close by. Keep that in mind when looking around.
Other questions you need to ask
Some other things you need to consider from a property manager’s perspective:
- The number of bedrooms. Three or four is great – five and you start buying homes where there are more people in the house, which means more wear and tear.
- Transport: This is a big one! You want to be as close as possible to good transport like a train line. Do some research and find out where the next train lines will be built for quick capital gains.
- Amenities: This is fairly obvious – you want to be close to a few shops and easy access to do the groceries.Both transport and amenities change the profile of the tenants likely to rent your place – which again, contributes to how much maintenance you might expect.
For example if you’re going for a higher rental return strategy buying close to a university can work well. Uni students are typically prepared to pay a higher price because it’s still a low price for each individual student plus they know it’s hard to get another rental. Just add a little extra to your rental price for the extra risk and work it requires.
- Views: They might help with capital growth strategy but tenants don’t like to pay a lot of extra dollars for a good view. So if you’re going for rental return – a property with a view probably won’t work.
Remember, being able to purchase a property is just the beginning. You might think of yourself as an investor, but really, you’re a property manager as well so you need to consider what impact tenants are going to have on your property, and you need to judge your decision with these variables in mind.
It’s definitely worth thinking about this beforehand – it’ll make your property journey more satisfying, and ultimately more rewarding.