The 10 Features of a Great Investment Property
Investing in property opens the door to long-term yields and capital growth. But making the wrong choices leads to unprofitable investments. These are the ten features that a great investment property has.
Property investments aren’t a way to get rich quickly. If you’re considering them, you have to wonder about more than “how much can I afford to spend on a property?”
What property investment does offer is stability. When investing in stock and shares, you could lose huge amounts of money in the space of a week. Property is a long-term investment and generates more reliable returns.
But that doesn’t happen for everybody. You may end up asking yourself “why is property a great investment?” if your property doesn’t generate a high enough yield.
Sometimes, it’s the market’s fault. However, bad investment decisions usually play the biggest role.
If you choose the wrong investment property, you can’t expect a good return. To avoid that problem, look for these features of a great investment property.
Feature #1 – A Good Location
Everybody tells you that the location is key when investing in property. That’s because it’s true. It’s crucial that you ask “how do I find the right suburb for me?” However, you also have to pick the right location for tenants.
This varies depending on the tenants you want to attract. For example, families want to have schools and leisure facilities nearby. Young professionals need easy access into the city. Your property’s proximity to such features plays a huge role in the investment’s success. If you can’t offer what your tenants need, you can’t charge as much as investors who can.
There’s also the growth issue to consider. Look at the local economy to see what state the region is in. Solid infrastructure, or planned improvements, show that a location has growth potential. You’re also looking for healthy local businesses and educational facilities.
A poor location limits what you can charge tenants. Furthermore, investing in a declining area results in losses when you sell.
Feature #2 – The Purchase Price
Asking yourself “how much can I afford to spend on a property?” isn’t enough when determining a purchase price. Remember that you’re looking to make a profit. Just because you can afford to spend more, it doesn’t mean that you have to.
This is where comparing a property’s purchase price to its intrinsic value can help. The intrinsic value is the property’s true value. Several factors go into determining it, such as its yield and growth potential.
The purchase price is how much you end up buying the property for. Everything from the quality of your buyer’s agent to the seller’s motivations can affect this price.
This is the general rule. The purchase price must be less than the property’s intrinsic value. That’s how you generate returns.
Research is the only way you’ll determine the property’s intrinsic value. Conduct due diligence, and look for properties that are on sale for less than they are really worth.
Feature #3 – Small Flaws
This seems like a strange feature to include. However, looking for small flaws may be your path to snagging a great investment property.
Here’s how it works. Most investors believe that even the smallest of flaws detract from the investment. Many want to buy properties that they can earn money from straight away. They don’t wish to invest further after the initial purchase.
This means that you face less competition when you look for small flaws. The key here is that the flaw must be a fairly quick fix. You don’t want to spend months trying to renovate a property, as the investment will go sour.
Instead, look for a couple of small issues that make the property less attractive, but that you can fix. Then, fix them. This immediately improves the property’s value, and opens it up to new tenants and buyers. Plus, you’ll usually spend less than you expected to.
Feature #4 – Low Maintenance
What’s one of the biggest mistakes that you can make when buying an investment property? It’s buying without knowing the answer to the following question:
What are the additional costs involved in buying property?
For investors, those costs involve much more than mortgage and legal fees. You’re responsible for the property’s upkeep too. If you don’t keep up with the maintenance work, you can’t attract tenants. You’ll also develop a reputation for bad service, which further damages the property’s ability to generate a yield.
As a result, a great investment property has as few maintenance issues as possible. Outside of the basics, you shouldn’t have to spend lots of money each month just to keep it operating.
High maintenance becomes more of an issue when you buy luxurious properties. They have all sorts of appliances and systems that you have to keep an eye on. That generates more cost, which eats into your yields.
In this instance, low maintenance means a property that doesn’t drain your budget with maintenance issues. Make life easier on yourself and choose a property that doesn’t experience regular issues.
Feature #5 – A Good Rent-to-Price Ratio
Let’s dig deeper into some of the financial aspects now. Those of you investing for yield need to figure out how to offer the right rent.
Here’s what you’re trying to achieve. You want to be able to offer tenants a yearly rent of 5% or less of your property’s purchase price.
Why is that important?
Most renters weigh up the pros and cons of renting vs buying. If they’re spending too much on rent, they may as well take some time to save that money and buy.
The right rent-to-price ratio can prevent that from happening.
Let’s assume you buy a house for $500,000. At a 5% ratio, your tenants pay you $25,000 per year. That’s a sizeable income, plus it’s not so large that tenants decide to save money for their own homes instead.
A great investment property allows you to offer a suitable rent-to-price ratio. If yours exceeds 5%, you may end up charging too much. This prices you out of the market and lowers demand for the property.
Feature #6 – Low Vacancy Rates
This relates more to the location than the property, but it’s still an important point to make.
To earn money from your investment, you need reliable tenants. There must also be some demand for rental properties.
As a result, you’ll often find a great investment property in areas that have low vacancy rates. This indicates that the region has a strong local economy and that there’s demand for properties. Furthermore, low vacancy rates indicate that current landlords don’t have problems with tenants. If they did, there would be more evictions, which leads to higher vacancy rates.
Low vacancy rates also mean that tenants have fewer choices. As a result, they’ll be more inclined to find out what your property has to offer.
Feature #7 – Long-Term Appeal
Trends affect the property market regularly. A new development crops up and every investor tries to jump on board. Or, certain building styles come into fashion. This also leads to a spate of investor purchases.
This is the key thing to remember. Trends come and go. What’s popular today may not be so popular tomorrow. As a result, you can’t assume that you’ve found a great investment property because it meshes with current trends. Looking to the long term is the key.
Instead of following trends, look for properties that stand out on their own merits. Key features, like storage space and sizeable bedrooms, don’t go out of fashion. Look for these features over the short-term trendy ones.
Feature #8 – Fast Turnaround from Purchase to Renting
This feature links into the small flaws feature mentioned above. There’s a reason for the distinction between small and large flaws. Small flaws lead to bargains and they’re quick to fix. Large flaws can take months of work to remedy.
The longer it takes to fix the flaws, the more time you spend without a tenant in your property. With a great investment property, you have to go from purchasing to renting out the property quickly. Otherwise, it’s costing you more money without generating any returns.
Calculate the amount of time it will take to make any fixes. The longer the fixing period, the less attractive the property becomes as an investment.
Feature #9 – It’s Not Industry-Dependent
The presence of local industry leads to property booms. This happened in Western Australia when the mining boom happened. People moved over in droves to find work. Sellers and investors rubbed their hands in glee as prices soared.
Then, the boom ended. Those who’d bought investment properties during the boom felt the sting. People moved away from Western Australia, which lowered demand for their properties. They had to drop rents, which made them less able to afford their mortgages. Repossessions increased as the state’s property bubble burst.
Here’s the point. Investing based on short-term economic boosts leads to danger. Remember that property is a long-term investment. In an industry-dependent region, it’s the industry that determines the success of your investment. If that industry fails, your investment may follow it. Look for properties in regions that have several industries.
Feature #10 – The Little Things
Beyond all of this, your investment property must have the little things that tenants look for. Storage space plays more of a role than you may expect in tenants’ decisions. Something as simple as wall space for shelves can turn a good investment property into a great one.
Modern kitchens and bathrooms also factor into the decision-making process. So too does the size of the bedrooms.
Also, consider the kerbside appeal. If a property doesn’t look good from the outside, it won’t attract much interest.
Luckily, you have control of many of these little things. Still, it’s important that your property allows you to take care of them.
The Final Word
As you can see, there’s a lot that goes into choosing a great investment property. A desirable location is just the start. You’re looking for multiple industries, which ensures tenants have career options. This lowers vacancy rates, thus improving your rental yields.
The property itself may need small fixes. These aren’t a problem. As long as there’s a quick turnaround between purchasing and renting, those little flaws can serve you. If there’s potential, and the property doesn’t need much maintenance, you’re onto a good investment.
Keep this advice in mind when looking at investment properties. The right combination of these features could help you generate more income.