Today’s property investor is spoilt for choice; some would say they are bombarded with possibilities. There are thousands of potential properties available, and with advertisements boasting capital growth and/or guaranteed rental returns, how does an investor determine what will work best for them?
Logically, the best property is the one that is in the most demand. If a lot of people are all competing for your single property, then the price you can charge to purchase or rent the property can be high. You hold all the power. If there are only a few people competing for your property, then the price you can charge is much lower.
This process is illustrated in the property clock, which shows the different phases of the property market.
Of course there are more variables to think about. We like to split these into two; returns and price.
Returns relate to the money that you make from owning the property. For every property the return will be different, with demand dictating how much return you will make. Return can be calculated by adding together capital growth, rental income and tax benefits. As you would expect this is super important for owning a property as for most of us, we just can’t afford to purchase a property outright, there needs to be a way to afford owning it while it matures.
If rent and tax benefits are low, DO NOT INVEST!
Most people upon hearing this believe that the most expensive properties are the best investments, but this is not true. It’s unusual to find a property that offers both a high rental return and high capital growth. Most high priced upper market suburbs are historically top capital growth performers; however rental returns are often abysmal. As a contrast, country properties or suburbs on the outskirts of a city historically have higher rentals but lower growth rates.
Now that might not sound like the best thing ever, after all we want high return, but think about it this way. High rent – means affording the property isn’t very difficult, after all you have a consistent stream of revenue coming in to afford loan repayments. That means that you can just let the property sit, letting all of the external market forces drive the price of your property up and up. And while your investment matures you are getting rent and tax benefits.
We want properties on the fringes of big cities, so who wants to live in those properties? As it turns out, double income families with two kids are just who we are after, and they happen to want new, modern homes, with 4 bedrooms, ensuites, a home study, car spaces, generous storage space and modern fixtures and fittings.
So now not only do we know where we want to build, but we also know who to build for. The only other variable to think about is price.
The rental market is driven by affordability, and as a general rule of thumb rental income should not exceed one third of a tenant’s income. Keeping this in mind, it becomes pretty obvious that a lot of the time, investing in your backyard is not the best way to go, especially if you are living within a city. It might be hard not thinking about property investing emotionally, however it’s realistically your best bet for making return. One third is the go-to measurement because people typically spend their income in three ways; one third for tax, one third for living expenses and the final third for mortgage or rent. So when charging rent, base your figure on what your market can afford, all dependent on income.
If you don’t know the income of the market you want to invest in or just don’t know where in Australia you should invest, feel free to give us a call! Our experts know all of the best places and can give you the inside scoop!