Buying rental property can be a great way to create wealth and secure your financial future. After all, everyone needs somewhere to live. So, if you buy the right property at the right price, you can be rewarded with strong capital growth and positive cash flow from rental income. On top of that come generous tax breaks that can help reduce your taxable income.
However, that doesn’t mean every property purchase is a good one. Instead, you need to be very selective, because buying the wrong asset can have serious financial consequences.
With that in mind, what do you need to consider when buying an investment property?
It all starts with research
Getting a return on your investment in real estate is never guaranteed. So, the key to making a good investment starts with good research.
While there are lots of metrics investors commonly look at, here are three key indicators you should pay close attention to during your property search:
- Capital growth potential
- Rental demand
- Rental yields
Assessing capital growth potential
While history suggests Australian property prices rise over the long term, not all properties are created equal in terms of their capital growth potential.
You want to get this right because buying an investment property with high capital growth potential doesn’t just benefit you when it’s time to sell. It also helps you build a property portfolio that can generate life-changing wealth in the long term, as you can leverage the equity you build to fund the deposits on future investment properties.
Where you choose to buy real estate can make a huge difference to how successful you ultimately are. So, you need to first choose the best area to invest in property by considering:
- Historical sales data
- Vacancy rates
- The strength of the local economy
- Future infrastructure and development plans
- Access to transport links, schools, universities
- Distance to restaurants, shops, parks, and other lifestyle amenities
Buy real estate that tenants want to rent
While location does most of the heavy lifting when it comes to capital growth potential, you also want to buy a quality property that will always be in high demand with your target market. That way, you can attract the best possible tenants, fill vacancies faster and charge the highest possible rents.
To do that, put yourself in a prospective tenant’s shoes and think about what they will be searching for in a rental. Think about features such as the:
- Size and number of bedrooms
- Storage space available
- Natural light
- Availability of off-street parking
- Appliances in the kitchen
Why’s high rental yield important?
A property’s rental yield tells you the return you might expect to make if you go ahead with the investment property purchase. All things being equal, higher is better, as a high rental yield indicates a good cashflow.
To calculate the gross rental yield of a property, divide the expected annual rental income by the property value and multiply that figure by 100.
For example, imagine a house was on the market for $650,000. If the typical rental rate for this kind of home in this particular area was $500 per week, the expected annual rental income would be $26,000 (52 x $500).
As such, the property’s gross rental yield would be 4%, as $26,000 divided by $650,000 and then multiplied by 100 is 4%.Want to buy a high-quality investment property? Buyer’s agent Ryan Goodinson can help. Book a free 45-minute strategy session by calling Ryan on 0419 000 794 or emailing ryan@insightfulproperty.com.au