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How to buy an investment property

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The time for talking is over. You’re ready to buy your first investment property. The bank has confirmed how much you can borrow and you’ve been inspecting properties to buy, but still there are so many questions.

Which type of property should I buy? A house or an apartment? A new property or an established home? A property in the city, suburbs or a regional town? Should I be focused on capital growth or rental yield?

Some investors favour buying “the worst house in the best street” and renovating it to generate equity. Others love buying apartments off the plan because of the stamp duty savings, depreciation benefits and lack of maintenance. And some will only buy near where they live because they have a thorough knowledge of local property values while others aim for the next “hot” suburb to buy before prices skyrocket.

This should not be confusing. It is heartening to know that there are many ways to make money from property and they can all work. It depends on your strategy. The thing to note is that there are several factors that are common to many property investment philosophies. Here’s my highlights:

  • Location. Buy close to services that people want such as shops, train stations and schools. Avoid noisy roads and favour attractive neighbourhoods.

  • Scarcity.  Art deco apartments and Victorian cottage houses are popular throughout property cycles because they are in limited supply which increases demand and price.

  • Features. Properties with views or attractions such as outdoor living spaces or units in small blocks with off-street parking attract premium prices and rents.

  • Demand. Median valued properties will have broad appeal. Low rental vacancy rates prove high demand and ongoing income. Ensure regional infrastructure can support a range of industries and activities which draw tenants through growth in population and jobs.

  • Capital growth. Increasing property prices build equity or profit which can be used to expand a portfolio, reduce debt or finance lifestyle. Negative gearing advocates aim to maximise how much capital growth their money can buy rather than how many rooms or how much land. In other words, they might buy a one-bedroom apartment instead of a four-bedroom house at the same price.

  • Rental yield. Strong rental income finances investment and builds a portfolio with a cashflow buffer that protects against worries over debt. With “cashflow as king”, many investors have built substantial portfolios in relatively short periods.

  • Wow factors. Impressive features such as water views, closeness to beaches, rooftop decks or over-sized garages can draw extra dollars now and in future.

  • Buy value. Aim to make money when you buy, not when you sell.

  • Presentation. Properties that look good rent well. Investors willing to renovate don’t have to pay for presentation if they get a tired property and significantly improve it with inexpensive cosmetic changes such as repainting or renewing kitchen doors or benches. This can lead to increased rent, faster capital growth and higher quality tenants.

  • Potential. What can this property be turned into? Can you create an extra bedroom with a wall in the lounge? Can the backyard be subdivided for sale or construction of a second dwelling?

  • Compromise. Write a list of factors you want in a property and aim for the main targets. Rarely will the first purchase be your dream home. Use it to kick-start your property portfolio according to your strategy.

  • Think outside the square. Consider buying an investment property while you rent. By renting where you want to live and buying in an area you can afford, you can get a foot on the property ladder and aim to step up after a few years of growth. Or buy with a friend if you can’t afford a property alone.

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