One of the most common questions we get asked by our clients is what to look for in a good quality investment property?
We obviously spend quite a bit of time focusing on this in our academy and break this down in a lot of detail, as so many property investors get this wrong.
Rent is very important as we discuss in the academy for two main reasons: first of all it can be a great passive income stream. Secondly, it is a great tool to help you hold onto investment properties long-term so that you can realise gains through capital growth. In other words, afford all the expenses associated with a property while the value goes up, making you wealthier.
In this article we’re going to talk primarily about getting a good rental return – what ticks all of the boxes for a tenant? Obviously to get the highest rent, we have to appeal to the most tenants. So we have to put a marketing hat on, look at things from a tenant’s perspective and think about what they are going to want in a property.
Features that achieve a higher rent, and appeal to tenants make a quality investment property.
One of the most common mistakes investors make is buying a shoebox because they think that it will ‘just be rented out’. The problem is that like most other people, tenants don’t like to live all cramped up! In Sydney, we see a lot of people who are used to living in a house downsize and move into apartments. They’re used to space, so apartments with good size bedrooms and living areas will be more attractive.
Don’t forget however, this is very area specific. Many inner city suburbs in Sydney will generally have smaller dwelling sizes, designed this way to accommodate for the bigger demand to live in those areas. Think about areas like newtown, redfern, rozelle, camperdown and randwick, areas with a high percentage of student population for instance. Studio apartments and sharehouses make good sense here but these would not be as practical in more suburban or Western Sydney areas.
Close to infrastructure
This is my issue with investment properties that are in fringe Sydney suburbs too far away from major urban centres and infrastructure. In some cases, these investors are better off owning properties in other markets if they cannot afford a proper investment grade property in Sydney.
If renting and not owning your own home, you’re normally less likely to make lifestyle sacrifices. Think about a young person moving out of home, a young couple or an elderly couple.
Young people may be less able to afford to buy, but they would elect to rent in a more premium area in an apartment or sharehouse than the more suburban area where their family home is.
A young couple has normally the combined savings of two people, their common behaviours are to rent in an area to try it before buying or rent in an area they can’t afford to buy in.
The same can be said of an elderly person if they want to rent. Why would they do this rather than buy? Affordability, and perhaps needing to be within walking distance of the shops and transport if unable to drive?
So a property that appeals to these types of renters will create a lot of demand, and drive a good rental return. Good infrastructure includes being close to lifestyle amenities like gyms, cafes and pools, schools, train stations, ferry wharfs, shopping centres and business parks.
A good tool to use is walkscore but infrastructure is pretty easy to observe.
Internal modern Features
Things like air conditioners, dishwashers and storage cages are becoming more mandatory for renters rather than extra luxuries. Just because a property doesn’t have these doesn’t mean it won’t make a great investment property, as you can normally put these in! They will also add to the purchase value of your property.
Again, think about yourself. If there are lots of new dwellings in the area that have modern features, what will that do to the demand of a property without these features?
Another example is kitchen size. A small kitchen might be adequate for a renter who lives alone and is on the go, but would potentially alienate a family from living in the dwelling.
Why it’s important to consider these features? What if the market is hot?
I see your point.
Like the market for selling and buying property, the rental market fluctuates. It is very seasonal year on year, and can be very erratic over the long-term. Several years ago in Sydney, tenants would compete and bid in $50 per week increments to get into properties. Now the market is a lot slower.
In a slower market, vacancies get larger as there are more properties sitting on the market and less tenants to soak them up. Tenants get more picky under these circumstances as they have options.
The properties that suffer are older properties that present poorly, where rents drop. These are not quality investment properties; whereas some properties we rent out that are newer and within 100 metres of a shopping centre still hold the same rents over a number of years.
You want to find a property that will rent well in a slow market, so that you ‘plan for a rainy day’ which is one of the tenets of our Sydney Listings Investment Philosophy. If a property has these features it will tend to make for a better investment property anyway.