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An Introduction to Property Investing - Part 1

Providing that you have the required finances and/or bank approvals in place, investing in property is easy.  The hard part, however, is knowing when to invest, where to invest, what type of property to invest in and assessing the right time to sell.  To be able to address those matters, investors must be able to answer numerous questions, including:

• Are property prices trending up or down?
• What are rental demand and potential rental yields like?
• What location should I buy in?
• Should I buy an established or new property? 

In this Part 1 of our 3-part series “An Introduction to Property Investing”, we will look at what an investment property is and the main considerations when investing in property.

So, let’s start at the beginning and consider what we mean when referring to an investment property.

What is an Investment Property?

An investment property is real estate bought with the intention that the owner will achieve a positive financial return.  This return can be in the form of rental yield where the owner rents out the property or it can be a return in the future when the property is sold after achieving suitable capital growth.  While a good investment property should give an owner both types of financial return, our experience has shown that the bulk of the overall return is usually in the form of capital growth rather than rent.

Given that the principal goal of an investment property is usually to grow wealth and generate a passive income, the things to look for in an ideal investment are usually very different from what you would seek when buying somewhere to call home.

The following are some leading purchasing considerations for investors which should help navigate what can be a very uncertain environment.

Capital Growth

Capital growth is basically the increase in the value of the property over time. To establish the growth prospects for a property you are interested in, look at the historic growth-trend indicators.  For instance, research what the median sale price for the suburb is and establish the extent to which this figure has increased, or decreased, over the past, say, 5 years. 

At Turner Mayes Real Estate, we have available a number of tools that enable us to understand what is happening to capital growth in suburbs across the Gold Coast.  The information we can gather includes past sales history in a suburb, demographic information, nearby schools and median rentals.  This information is invaluable in helping understand the potential capital growth achievable for a particular property in the years ahead.

Rental Demand and Yield

Demand

Investors usually rent out their property to generate income (this also helps cover costs such as mortgage, rates and insurance).  Buying a property of a type (e.g., unit versus house) and in an area that has strong rental demand ensures that the property consistently generates the expected income.  Therefore, properly researching an area to ensure it has strong rental demand is a fundamental part of establishing whether owning an investment property there is going to work well for investment purposes.

Yield

In addition to rental demand, ensuring that a property is of a type and in an area where it can command a strong rental yield is also important. 

In broad terms, rental yield is a calculation of a property’s profitability based on the expected rental income balanced against the costs of owning and maintaining it.  These costs include mortgage repayments, body corporate fees, council rates, maintenance and insurance.  As an investor you should aim to have a steady, reliable rental income stream that covers all, or at least a significant proportion, of these costs.

It is important to examine the performance history of properties similar to and in the same suburb as the property you are interested in.  Consider vacancy rates, average rental yields, median weekly rents and the potential for future rental growth, together with the types of property in the suburb that are in particular demand with tenants. 

Rental yields can be calculated as gross and net figures.  A gross rental yield is total annual rent divided by the total value of the property, and which is then multiplied by 100 to get a percentage.  For example, the gross rental yield for an investment property worth $500,000 with a weekly rent of $500 will be as follows:

$26,000 ($500 rent x 52 weeks) / $500,000 = 0.052 x 100 = 5.2%

To calculate the net rental yield on the same property, you’ll need to take into account all costs and fees of owning the property.  Let’s assume, on an annual basis, these are:

The net rental yield of the property would be:

$26,000 ($500 x 52 weeks) – $5,200 / $500,000 = 0.0416 x 100 = 4.16%

We’ve not included mortgage repayments in the above calculation because these vary significantly depending on individual situations.  Do ensure that these are factored in, as they can form a significant portion of the costs of owning a property.

Conclusion

We hope that Part 1 of this series on property investing has been helpful and of interest.  In Part 2 we will look at further important matters such as location, house versus unit, new versus established and property features that give premium rental yields.  And Part 3 will conclude our series by considering when is the best time to sell an investment property.

If you should have questions about this article or you would like a confidential discussion about how we can help you identify a suitable investment property or assist you with the sale of a property (whether or not it is an investment property), please contact Peter Turner.