Chose a suburb then start looking for bargains. Photo / Janna Dixon
As someone who helps homebuyers and investors with all aspects of buying, including where and what to buy and at what price, I've developed some key guidelines for people considering investing in residential property.
Buy well to start with.
The two key elements to buying well, not surprisingly, relate to value. Specifically, they are buying below market value and buying in suburbs that will appreciate in price at a greater rate than other areas.
There are always opportunities to buy below market value; distressed sales, deceased estates, mortgagee sales, etc. If you seek these potential bargain properties as your primary objective you will have to have a wide-angle approach and be prepared to buy anywhere across the the region. You might be buying in some suburbs that you don't fully understand. That means you are buying blind.
A better tactic is to first select a number of suburbs that you consider are candidates for rapid capital appreciation. Once you have identified target suburbs you can start looking for comparative bargains within them. Don't necessarily just look for mortgagee sales and the like, there are too few of them and too many ambulance chaser investors following them. A bargain might well be a run-down villa in outer Kingsland next to a small factory. Will it always look like this or is the area ripe for redevelopment and likely to appeal to dual-income professional couples in the near future? You will still need to negotiate a good price and walk away if you don't get one.
Focus on capital appreciation.
Don't get obsessed searching for cash-positive deals (where the rent at least covers the cost of the loan and other outgoings). They may end up pushing you into areas that will show low or slow appreciation. Of course it is important that you are aware of the component costs of your investment - interest, rates, property managers, maintenance, etc - and that you can service them, however the only game in town is capital growth. A $500,000 property with a rental shortfall of $5000 a year over 10 years might seem costly but if it achieves a compound growth of 10 per cent per annum and you sell it for $1.3 million it's a far better investment than a property that has earned you a $5000 surplus each year but appreciates by only 2 per cent per annum and sells for $609,000 after 10 years.
Before you buy, think about selling.
Remember that the end-game is about selling and making the maximum gain. What are the factors that will attract buyer interest when it comes time to sell? Is there something special about a property that will make it stand out and positively differentiate it from other homes; a secluded position, sunny living areas, good schools, access to the CBD, shopping and motorways? Better still, is there something that prospective buyers might fall in love with; a sea view, a spectacular city skyline, an established garden, walking access to beaches, parks and reserves?
Ask yourself the 'what if' questions.
Finally, consider your position if things change. What if interest rates increase significantly? Will I still be able to service the debt? What if I need to sell quickly after only a year and make little or no capital gain? How much will my foray into property investment potentially have cost me including real estate agent fees to sell? What if I get troublesome tenants and am faced with rental disputes or late payments? Can I cope financially if the demand for rental homes changes and the house is unoccupied for an extended period?
On the other hand, ask yourself, what if I do buy at the right price in an area that's about to take off? What am I going to do with the money?