Top 5 considerations when buying a rental investment image 1

Top 5 considerations when buying a rental investment

Thursday 14 Oct 2021

Investing in property may seem daunting but when strategy, timing and favourable market conditions are in play, it can be both extremely profitable and relatively low maintenance. A seasoned investor will tell you it’s pretty much impossible to do too much research into your target area.

This brings us to our starting point – do your research. Before you even start looking to buy an investment property, first take some time to learn about and understand the market. Look into different locations, relative prices, property types, proximity to schools or the town centre, rates, insurance fees and maintenance costs and take the time to set your budget. It’s also a good time to talk with a professional property management company about their fees and structure. Determine a deposit you can put down and then see your bank or mortgage broker to discuss the next steps.

Once you’ve established how much capital you have to work with, take a look at our 5 top recommendations when buying a rental investment:

Return On Investment 

Return on investment or ROI is a performance measure, looking at the profitability of your investment. ROI potential varies dramatically between areas. ROI is calculated by taking the anticipated annual return (weekly rental x 52 weeks) and dividing it by the purchase price. For example, an $800,000 property returning $700 per week has a gross ROI of 4.5%. Factor in your rates, insurance, repairs and maintenance and anticipated vacant time and you’ll have a net return figure.

Location 

This affects everything, not just the purchase price. Consider the affect location has on capital gains, the kind of tenants you’ll get, the median income for the area you are looking to buy in, the income potential for the property, how many tenants are vying for the home, potentially even the level of maintenance to expect. Is it close to town? Is the property near good schools, cafe’s, restaurants, is it a sought-after location? Also, the location may determine the zoning of the area, hence what can be done with the land in the future.

Is it in demand 

If there is a balance in supply and demand of a product, prices are generally relatively static. As items become more scarce but demand remains, prices can go up, so naturally it’s tempting to buy when there is a lot of choice and more competition between sellers. An unusually high number of listings in one neighbourhood can either signal a seasonal cycle or perhaps a drop in demand for that area. Work out which one it is before buying. Also, it’s worth paying close attention to rental vacancies in an area – if properties are sitting for a long time untenanted, it may be worth re-evaluating and looking elsewhere.

Level of commitment 

Some properties quite require a significant time investment, impacting their value to landlords. For example, holiday rentals take a lot of time to manage, low quality properties can need a lot of maintenance and having a large number of tenants in a home can mean more wear and tear on a property. Much as generating strong ROI through more tenants and higher rental income can be tempting, offset the benefits with the drawbacks to your property and your lifestyle. Consider a property manager or property management company to minimise your time investment and ensure your legal responsibilities are met.

Unit, apartment or house 

It’s vital to understand the differences between Stratum in Freehold, Leasehold and Fee Simple legal tenures when purchasing, as each has different implications for owners. It’s a lot to discuss, so, if you’re interested get in touch with the Colliers team where we can explain the pros and cons of each type of tenure for investment property owners.  

In summary, starting or growing a portfolio depends on a multitude of factors, many of which are tied up in your personal situation rather than in the property’s attributes. Work out your priorities, then stick to them. Try to remain as impartial as possible about properties – the astute investor doesn’t get emotionally attached. Finally, if you have any questions or would like to learn more about investment opportunities in Otago, don’t hesitate to get in contact with the Colliers team to find out more.

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