What Should You Look For When Buying An Investment Property?
There are many pitfalls when it comes to buying a property, mainly when it’s an investment, with the sole aim of making you money.
You want your investment to be as successful as possible, and the key to achieving that end is buying right. That, in turn, is produced by conducting thorough due diligence by researching both a location you’re looking to buy in and properties in that area before you make any purchasing decisions.
Keep a check on your emotions; as an investor you need to look at every purchase objectively and go over every detail with a fine tooth comb to identify the imperfections, weighing up all the pros and cons before deciding to buy.
A recent survey by ME Bank found more than half of Australian homeowners spent less than an hour looking at a home to buy, with more than 25% running into problems after they bought. Those problems could be costly, which is the last thing an investor wants.
But what exactly should you be looking for when conducting due diligence to put you on the right track from the start? Each investment strategy can have specific things that are important to that strategy succeeding. Below is a general list of items we think are valuable to all investors to be successful.
The Property Investment Due Diligence Checklist
The location should be the first thing investors consider, as this is the one thing you can never change, followed by analysing individual properties. The list of things to research is lengthy, but here are some of the critical factors to include on your checklist:
Growth potential – A location may be set for growth if there is new infrastructure in the pipeline or a project that will create long-term employment and rejuvenate an area. This can draw more people in and create a higher demand for an existing property, which can push up prices. You can find out historical growth rates from data online such as CoreLogic, SQM Research, Onthehouse and Domain, but remember past growth is not always indicative of future growth.
Population growth – Jump online and look at the current and forecast growth figures for the area you’re researching. The Australian Bureau of Statistics is a good source of data, as well as local councils. You can also talk to locals to get anecdotal reports. If people are moving in, this means demand is rising, but as per the next point, supply also needs to be restricted to result in price growth.
Demand versus supply – Basic economics is the key to successful property investment. If demand is higher than supply, it follows that there will be upward pressure on rents and values. You can source data to get an idea of the demand/supply ratio in an area, but you’ll need to drill down further to look at the types of properties most in demand in the area, how many are available, how fast properties are selling and whether the property you’re looking to buy has any scarcity value or is unique in some way. While demand can be high, if there is a plentiful supply of property, there will be no upward pressure on rents and prices.
Demographics – Find out who lives in the area as this will give you a guide as to what types of properties are in demand. This can include finding out the employment rate and average income level – the more people that are employed and the higher the income, the better, as residents can afford to pay and pay more, which pushes up rental rates and property values. High unemployment areas should be avoided.
Rental and vacancy rates – Data houses such as CoreLogic, SQM Research and even realestate.com.au suburb profiles have information about rental and vacancy rates in locations. The latter is indicative of how much rental stock is on the market, which influences how much rent can be charged.
Aesthetics – Is the property appealing in terms of looks, layout and aspect? If it’s attractive tenants will want to rent it, and buyers will want to buy it when it comes time to sell. Things to look for include the number of bedrooms and bathrooms, the outdoor area, the number of car spaces, light, views and privacy.
Proximity to Amenity – Is the property close to shops, cafes and restaurants, schools, services, public transport and more importantly, employment nodes? People want the convenience of being near these things, and if the property ticks the boxes demand can be higher, pushing up the rent and value.
Accessibility – While public transport is essential, many people drive, so it’s important to have major roads nearby linking the suburb with other parts of the city. While roads in and out are great, make sure they’re not clogged with traffic, as this will be a negative for the property, and make sure the property doesn’t sit on a busy major road.
Potential to Add Value – As an investor, any opportunity to add value, whether it be through a renovation or development, can be crucial. Consider whether you can undertake any works that will lead to a capital gain and find out what the zoning is to determine whether a development is possible (if not now, then maybe in the future), which may add value to your property even if you don’t do the project yourself. The lot size is part of this, with lots of 400sq m or bigger preferable.
Future Planning – Find out what you can about zoning changes and town planning for the location you’re looking at, and around specific properties. While a change in zoning allowing subdivision might increase your property value, the construction of a vast apartment block next to your house will not.
Strata Management – If you’re buying an apartment or townhouse managed by a strata scheme or body corporate conduct the necessary searches to ensure it’s running well and no significant outlays are planned. You need to know what the rules are and what your obligations will be, especially in terms of quarterly contributions and how much is in the sinking fund. Strata regulations are state-based, so if your buying interstate, research the relevant legislation in that state.
Flood Risk – Find out if the property you’re looking at is subject to flooding and/or has been affected by flooding in the past. It’s best to stay away from these properties due to both the risk and high insurance premiums. Many councils, such as Brisbane City, Sunshine Coast and Moreton Bay Councils have great flood mapping tools to help you narrow your search.
Fire Risk – Investigate whether the property is in a bushfire prone area, and if so, whether it is built according to regulations and can be covered by insurance (See Flood Risk). Again, local councils can help with this information, including maps. Check for smoke alarms within the property, and also the local regulations for investment properties as some big changes are happening in some states.
Yield – The numbers are crucial for investments, as it will determine how much it will cost you to hold the property. You can find data that tells you the yield for houses in a particular suburb through research houses such as CoreLogic, but since dwellings can vary dramatically, you’ll need to do the sums for individual properties you’re considering buying. To find out the yield for your property divide the annual rent or income by the purchase price (Annual income/purchase price = yield). The higher the yield, the better the income it generates. Generally, the rent will be higher if demand exceeds supply, with the property appealing to tenants due to its features and location. If the property isn’t currently leased, get a rental appraisal from a few different agents.
Building and Pest Inspections – This is critical to identify any physical issues with the property, but it’s usually undertaken after you have signed a contract. If there are major issues to rectify, or if the property is one that needs a lot of maintenance, you might want to rethink the purchase as it will be costly and affect your bottom line.
Utilities- Another critical search to reduce your risk and ensure the property is not affected by sewers, stormwater drains, NBN, Telstra and electricity lines. These days it can be done relatively easily at www.1100.com.au.
How Can Buyers Agents Help?
Identifying and buying the right investment property is hard work. All of the above factors – and often more – need to be considered together to make an educated decision rather than looking at one factor in isolation.
Most people only buy a home a few times in their life, and with inexperience, getting the formula right can be tricky. Buyers’ agents, on the other hand, look at properties every day and are experts at identifying investment-grade properties and conducting due diligence, as well as remaining objective in analysing its potential.
Buyers’ Agents discuss and narrow a property brief with their clients based on their budget, strategy and personal requirements. They conduct research to identify suitable locations and conduct property inspections at that location, asking the right questions of real estate agents and other authorities to properly analyse a possible investment. They prepare appraisals and then conduct due diligence and negotiate the best outcome for their client.
Good Buyers Agents should always physically inspect the properties they are recommending to their clients. Most will also assist in recommending associated professionals such as Building and Pest, Legals, Town Planners, Engineers and Builders.
The Edge Property Buyers are Exclusive Buyers Agents and always work in the best interests of our clients. We are members of REBAA (Australia’s only national professional association for Buyer’s Agents.) and strictly adhere to their code of conduct. We are also proud members of REINSW, REIQ, PIPA and PICA