Question: I’ve found what I believe is the perfect suburb to be investing in right now. Rents are good, prices are going up and the cost of buying in the neighbourhood is well within my budget. It’s in an inner city area of Brisbane, which I believe is going to do well in the years ahead, so I’m really excited.
The problem I have is that I just can’t find a property I like. I know you should take emotion out of the equation, but I’m pretty positive that many tenants would agree with some of the grievances I’ve had with certain properties. Some have been too dark or damp, on a busy road or all of the above. I’ve been to about 55 house inspections and still nothing. I’m starting to lose hope of ever finding a good buy.
What I’d like to know is if it’s ever worth buying a so-so property (or even a bad one) just because it is in a really great area? Can what an area has going for it trump the individual features of a property there? My guess would be no. Am I wrong?
Answer: I think you have to ask yourself the reasons this suburb is going to grow. Have you analysed the demand to supply ratio or are you just using a gut feeling?
Every city has “hotspots” as well as suburbs that will always be in demand because of their proximity to transport, hospitals and shops. A lot of these suburbs are more expensive so their rental yield tends to be lower at around four or five per cent. Other suburbs a little further out from the city can be more affordable and have higher yields (over 6%) and strong growth potential. You need to understand exactly what your key objectives are before you research a suburb.
Single-family homes tend to attract longer-term renters in the form of families and couples. The reason families, or two adults in a relationship, are generally better tenants is that they are more likely to be financially stable and pay rent regularly. Two can live almost as cheaply as one, while still enjoying a dual income. As a landlord, you want to find a property and a neighbourhood that is going to attract that type of demographic.
When you have the neighbourhood narrowed down, look for a property that has appreciation potential and a good projected cash flow. Check out properties that are more expensive than you can afford as well as those within your reach – real estate can often sell below its listing price. For appreciation potential, you are looking for a property that, with a few cosmetic changes and some renovations, will attract tenants who are willing to pay higher rents. This will also serve you well by raising the value of the house if you choose to sell it after a few years.
As far as cash flow, you’ll need to speak to several local property managers to get a handle on local yields. Take the average rent for the neighbourhood and subtract your expected monthly mortgage payment, property taxes (divided by 12 months), insurance costs (also divided by 12) and a generous allowance for maintenance and repairs. Don't lie to yourself and underestimate the cost of maintenance and repairs or you will pay for it once the deal is done.
The Bottom Line
You can’t move the property once you’ve bought it. The location is critical. But you can add value via renovations. Every city has good neighbourhoods and every neighbourhood has good properties, but it takes a lot of footwork and research to line up all three. When you do find your ideal rental property, keep your expectations realistic and make sure that your own finances are in a healthy enough state that you can wait for the property to start producing cash flow rather than needing it desperately.
- Answer provided by Rich Harvey