Buying an investment property can be a smart financial decision. Do it right, and you can get a strong return through passive income, tax breaks, and equity gains.
But a big return on your investment is not a guarantee—you need to think strategically when choosing and purchasing your investment property, and to factor in local market trends on top of the general guidelines that dictate whether your investment is poised to succeed.
If this is your first time venturing into the world of investment properties, then it’s normal to feel a bit overwhelmed by the process. There’s a lot to consider, so you need to go in with a clear head and a strong understanding of what makes a good purchase.
To help you, we have highlighted the major factors worth considering when buying an investment property.
Location, Location, Location
The location of a property is one of the key considerations for tenants. Proximity to amenities, transport links and schools zones will have more tenants wanting to live there, and therefore likely to command a higher rent.
It is not only important to look at locations with strong historic rent levels and demand but also to consider ‘up and coming’ areas, where there is potential for growth in the rental level and property re-sale value.
Do the numbers stack up?
As the purchasing decision is a financial one, not an emotional one, it is important to check that the numbers will work for you. There will be fixed and variable expenses involved with the property including mortgage payments, rates, insurance, maintenance and repairs, property management fees.
To calculate the gross rental yield, divide the gross annual income by the purchase price.
For the net rental yield, you also need to include the related property expenses including mortgage, rates, etc.
Well maintained, well presented properties will attract more interest and demand and require less initial investment. An older property will most likely require additional investment to modernise kitchens and bathrooms which are larger capital expenses and will impact your rent return. Consider the time it will take to complete any work, as this will be time when there is no rental income. Is the additional cost likely to be recouped through rent received or capital gains?
Providing a warm, dry, healthy and well-maintained property helps to attract better quality tenants who are more likely to stay longer.
Familiarise yourself with the Residential Tenancies Act and the legislation surrounding Insulation and Healthy Homes Standards. Is the property compliant and if not, what is the cost of making it compliant? When does this work need to be completed?
Check council records to ensure that any property extensions, renovations are compliant with building code and have been fully consented. Due your due diligence.
Do you have the skills, knowledge and time to manage your property? Appointing a professional property manager to look after your investment(s), not only saves you time, but also minimizes the risk to you and your property.
Property managers have excellent systems and processes in place to save you time. They will enforce the terms of the lease and deal with any issues on your behalf as part of their everyday job. Having a property manager provides a degree of separation for you from your tenants, minimising potential emotional stress and conflict.
Identify your goals for your investment and have a plan to achieve these. How long do you plan to own it? Do you plan to buy additional investment properties? How will you achieve that? Build a trusting partnership with professionals who can help you achieve those goals.
With our industry expertise and local market experience, The Rent Shop Nelson is well placed to assist you as you start out on this journey, or look to add to your existing portfolio.
If you would like a no-obligation, independent rental appraisal on any listed property that you are considering, or want more information about out our property management services and points of difference, please contact our Business Development Manager in confidence – Julian Kett on 022 639 2620 or email at firstname.lastname@example.org