The main factors for understanding Property Investment
Property Investment is widely seen as the safest way to build wealth for the everyday Australian. It’s more stable than shares, has better growth potential than straight cash and, when set up correctly, takes a lot less time than trolling the stock market.
But just like everything else, investors can get themselves into sticky situations if they’re not careful with their purchase and understanding how an investment property can work for them.
Before we get started, lets look at what factors influence should be considered in every investment purchase
Supply and Demand
To put this factor simply, it’s how many people are looking for a product and how much product is available to servive that need.
Supply and Demand is one of the major triggers in whether your investment will succeed. When supply is high, the market is flooded. This increases competition in the sale of the product and prices drop. When demand is high, the competition is in the purchase of the product, which pushes up the price, (We are currently seeing high demand and low supply in the Brissy market).
What we want to focus on when we talk about risk is how likely is an investment to perform or what is its volatility and economic sensitivity.
There are a number of factors which influence the risk or volatility of an investment. The most common one we hear about, is what infrastructure is close to the investment which influences its demand.
The main factor which determines an investments’ risk is what determines its demand. Is the investment in a great school catchment, close to public transport or some major employment hub, as an example.
One great example, is mining communities.
The potential rents available to investment homes renting to FIFO mines are huge. Emerald was a great example of how investors got sucked into some risky investments because of the attractive rental returns, but the problem was there was only one demand driver – the mines! As soon as the minds stopped using this particular Real Estate method, rents tanked and investors were left with homes they couldn’t even sell as there was no demand for them.
Cashflow – the big one
How much money will it cost you to hold onto this investment, or how much money will it make you?
Cashflow covers a range of topics when we talk about investment, but it basically means money in vs money out. So we have our rent in, and our costs out, pretty simple. We then also have to consider vacancy rates as well as our tax returns for a property. Lets talk about each one of these four factors.
The main income source of an investment
So we all know what rent is, but do we know what factors increase or decrease a rental figure? A good way to wrap our heads around this is to understand attractions from a tenants perspective. They will pay attention to location, first and foremost. This includes transport options and travel times, it will also include catchment areas if they are a family, it will include what employment opportunities are close as well as what shopping and recreation opportunities are close by as well.
They will also look at what amenities the house itself has. For example, if in a complex, what kind of pool area, BBQ area, seating or kids areas etc. The age of the property is also a huge factor. If you had found two rentals you were thinking of renting, both apartments. One was 20 years old and the other was brand new and they were the same price, which would you choose? This also ties in with the fourth point, which is quality. Our vacancy rates also tie in closely with our rental attributes. If we supply a property that ticks a lot of the boxes from a tenants perspective, people will want to live there. They may even be prepared to pay a little extra for something that is perfect for them.
What it costs to hold onto the property
Now, some costs associated with investment are not specific to property types, like council rates, water rates or interest we pay on the loans. It doesn’t matter what type of property you buy or whether you buy new or old here, these will all be the same. In fact, sometimes it works out in our favour to buy new here.
For example, landlords cannot charge tenants for water if the water fixtures do not comply with water efficiency standards. So there can be a hidden cost there for landlords of old homes. We also then have either our body corporate costs or our maintenance costs of a property. Don’t forget, second hand homes require home and contents insurance, whereas townhomes and apartments only require contents, as the Body Corporate covers the external insurances.