Picking the right investment property

Choosing the right investment properties in the right locations can really make a difference to the success of your portfolio. At the end of the day, you need to select properties that will attract tenants - decreasing your vacancy rates and increasing your yield.

Here are some tips on how to choose properties that will open up your rental candidate pool:

Your property will be more easily rented if you appeal to the majority of the rental market. Houses with 3 bedrooms and units with 2 bedrooms are the most sought-after properties for renters since they open themselves up to sharing. While single bedroom units will still do fine, you will usually do better with a two bedroom unit since it opens up the pool of available renters. Same applies to houses - a three bedroom house will be an attractive prospect to young families and friends sharing. Larger four or five bedroom homes tend to be more for larger families that are renting.

Minimal Garden
When buying a house, consider the garden maintenance. While that ornate English country garden may look nice, it will be painful and expensive to maintain. Renters don't want to spend their weekends maintaining your garden. Keep it simple - look for low maintenance gardens when purchasing a house.

Access to transport, education and employment
Access to transport, education and employment is a critical factor in choosing a great rental property. Look for properties near major transport routes - train lines, buses, ferries and motorways. Choose something that is within 10km of a CBD for easy access to employment. Look for closeness to schools and universities.

Access to shops
Similarly, access to shops, restaurants and cafes is also a popular requirement of renters. People like to be able to walk to a cafe and have a coffee, or a short drive to their local grocery shopping centre.

Population growth, infrastructure and employment
You can get a fast boost to property values if you choose a property in an area where there is a forecast of high population growth, investment in major infrastructure and a demand for housing. Be sure to choose an area with sustainable employment though. For example, you can buy in a mining town where a new mining facility has just opened up, proving lots of employment and great rental yields, but be sure to understand the lifespan of that facility. If the town is built around that facility and the facility one day closes then you will be left out in the cold.

Important features to tenants
Tenants find the following features important, making your property much easier to let:
  • Bright and sunny
  • Internal laundry
  • A view/balconies
  • Car parking
  • Built-in-robes
  • Two toilets
A recent construction
The building depreciation expense provides are great after-tax benefit, especially for high income earners. If you can find something constructed recently, less than 15 years old, then you can claim the building construction as a depreciation expense for some time and this will provide a great boost to your after-tax cash flow.

Something affordable
Avoid properties that are expensive to rent and will restrict your rental pool. That $3m unit on the harbour which rents for $1800/week is likely to be attractive to only high-income earning renters. There are not many of these around so you will increase your periods of rental vacancies and usually have to settle for a much lower yield.

A good rental yield
Look for something with a reasonable rental yield, around 4.5% to 5.5%. Rental yield is the yearly income you receive from the property divided by the property value. Low rental yield properties will mean you end up paying a lot more out of your pocket to cover interest expenses and, with the probability of future interest rate rises, make your ability to service the loans that much harder. Be wary of very high yielding residential properties as well (those with >9%) since they will be high yielding for a reason - there might be low prospects of capital growth or they may be in a mining town where employment may be temporary. Just be sure you go in with your eyes open.

Good prospects for capital growth
We all want our properties to grow in value. Some areas will grow faster than others. Study up on the cities or regions that you plan to buy in and be sure to look for where they are in their property cycle. Some will be at a peak where others may be at the bottom. Property investment magazines publish data on a monthly basis on property cycles. Pick one up and be sure the area you buy in has good prospects for capital growth.

Reasonable strata fees
While that new unit complex with a gym, pool and 24 hour concierge might seem impressive, it will certainly cost you in strata fees. Such fees can be upwards of $2000 per quarter. A great property is one where you get good rental yields with strata fees that are in the order of $650 per quarter. If you must go for the gym/pool/concierge, make sure that the rental returns include the premium required to cover it.

High rental demand area
Do some research on the rental demand of the area in which you are buying to ensure that the demand is there. Most property investment magazines will give you a "demand to supply ratio" score for each suburb in Australia. Also keep an eye on vacancy rates - ideally, you would be looking for low vacancy rates of less than 2% to give yourself the best chance of finding tenants quickly.

The information provided is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. You should consider whether the information is appropriate to your needs and seek professional advice from a financial adviser before making any investment decisions.