Property Investment - Researching The Location
It's always wise to have an idea of what type
of property you're looking for when considering an investment and
this article outlines 8 of the different factors to consider when
researching specific locations.
1. Infrastructure
It's important to consider a town's infrastructure
when looking for an investment property, especially in terms of
what future investment is to be made in that area.
Local Authorities and Councils will have an annual
budget for both the maintenance of current infrastructure and also
for the construction of new infrastructure projects. Finding out
how much the annual budget is and future investment will give you
an idea of how proactive the authority is in attracting new residents,
extra funding and business opportunities.
Most councils will be happy to provide most of
the information and a lot of it will appear on their websites. Also
look at the websites of local big businesses to get information
on their future plans which will attract investment and create new
jobs in the area.
2. Proximity to Amenities
In most cases, the main purpose in buying an investment
property is to attract tenants who will pay a weekly or monthly
rent.
It's important to know what type of tenants you
are looking to attract and so any potential investment property
will need to be close to the amenities required by the tenants.
A city worker will want to rent a property close to shops and transport
whereas a farmer will have different requirements.
Most properties in close proximity to the town
will rent fairly easily compared to those which are a 15 minute
drive outside of the town. Properties close to the town will also
attract tenants who don't have their own transport.
So it's best to know what your tenants requirements
will be before you purchase.
3. Local Employers
It will always be easier to find tenants in towns
where there are large employers in the vicinity. These include factories,
large shopping malls, hospitals and universities.
With hospitals, many of the employees may be employed
on a temporary basis and so owning or buying their own property
in the area may not be a choice for them and renting is the easier
option. Also, in the case of universities, a lot of the students
will come from out of town and so renting is again the best option.
This offers them more flexibility however it also means that your
investment property could be vacant during certain months of the
year and may switch tenants on a regular basis.
Again, be sure to research the future plans of
these employers. If a major employer is due to shutdown or relocate
in the near future then there will be a glut of empty properties
with landlords doing whatever they can to fill them including drastically
reducing the rent.
4. Geographic Location
This will determine both the type of tenant you
get and also how easy your investment property will be to rent out.
Holiday properties near the ski fields will command
a higher rent than a property in the city however it may only rent
out for a few weeks per year. A beach house will also be in the
same position. Again, it's important to understand the type of tenants
in the area, what they are looking for, how much they are willing
to spend, etc.
A beach house may command a high rent but may only
attract retirees who are willing to pay top dollar and so this narrows
the number of potential tenants. Properties closer to cities and
amenities will likely attract a higher number of tenants willing
to pay a lower weekly rent.
5. Demographics
Spend time understanding the demographics of the
areas population and you will have a better idea of the type of
tenant you can expect.
Find out the populations' average salary, the different
age brackets, percentage of those married and single and the percentage
of the population that rent.
The demographic information will show if the town's
population has been growing or declining over the past number of
years and therefore if an investment is a safe bet. It will give
you an idea of the earning capacity of tenants and how much rent
you can expect.
It may also show movements of parts of the population
to new parts of the same area due to factory closures, increase
in crime etc.
6. Property Median Prices
Historical property prices will be a good indicator
to the fluctuations in property values in the area over time.
A property may look like a bargain at first glance
but with a little research you may discover that the same or similar
properties changed hands previously for a lot more money. There
may be a simple explanation for this such as a vendor wanting a
quick sale but it may also reflect a dive in the local property
market for various reasons.
Median prices will give an indication of what you
can expect to pay for the different types of properties (no. of
beds, land size, etc) in the area and the figures may also show
the number of recent sales. The historical figures will also give
a pattern of historical growth or decline in the area over time
and this could be used to indicate a property's future value.
7. Occupancy/Vacancy Rates
Each area will have a certain percentage of rental
properties tenanted (occupied) and the remainder without tenants
(vacant). Towns with a high vacancy rate (normally deemed to be
more than 4%) will make it possibly harder to find tenants to fill
your rental property as it shows a lot of competition for too few
renters.
Too few renters will also mean that landlords will
have to be more creative in attracting tenants and may need to reduce
the rent and offer other incentives to entice renters.
Areas with high employment and a strong outlook
for the future are likely to have a higher occupancy rate and this
may even cause competition amongst renters, allowing landlords to
set higher rents.
8. Property Managers
Finding a trustworthy property manager is important
if you will not be looking after the property yourself in terms
of finding tenants and collecting the weekly or monthly rent.
Good property managers will communicate regularly,
carry out periodic property inspections, arrange repairs and, most
importantly, regularly deposit the rent (minus expenses) to your
bank account.
There are also many other duties a property manager
can carry out and it's important to question those managers in the
potential area to find one or more likely candidates that are going
to take care of your investment.
Find out how many rental properties they manage,
how long they've been in business and ay other questions you deem
necessary until you find one you are happy with.
In closing, the above points are only guides for
you to learn more about an area before you make an investment. There
may be more factors you'll need to consider depending on your situation
but if you research the above you naturally increase the amount
of knowledge you have about the area. And the more knowledge you
have will reduce the risk of a potentially poor investment.
5 Steps To Successful Property Investment
When looking to invest in property it's always
important to take a structured approach to ensure you get only what
you are looking for. Over the years I've developed the following
structure and I'll always stick to it so that I know I have done
all the homework necessary to make a sound investment and reduce
any potential risk to a level I'm comfortable with.
Step 1 - Research Research Research
This is possibly the most important aspect of any
investment decision. When I talk about 'researching' a potential
investment, what I mean is to do all the necessary homework to find
out if the investment is right for you and if it will provide the
return you're looking for.
Sometimes it is tempting to overlook research and
maybe follow a tip from a friend on a potential investment. Many
people also don't do research because they don't know where to find
the required information and so they may make a blind investment,
hoping on good returns. Even worse, they may put off making the
decision (to invest or not to invest) and stay stuck in procrastination
while the asset starts to show strong growth.
So what needs to be researched before investing
in property
Location - such things as the population, main
industry, main employers, future investment in infrastructure, tourism,
local universities.
Property prices - average, median, recent sales,
potential rental returns, previous and predicted growth.
Tax and ownership laws - country and state laws,
occupier/investor tax rates.
There may be more areas you need to research depending
on your situation but the main objective here is to carry out the
research to a level you are comfortable with. You can never do too
much research.
Thorough research will give you peace of mind to
make confident investment decisions.
Whatever you are trying to achieve, someone has
already done it before and the information is out there. It may
be in books, newspapers, special reports, published on the Internet
or available from real estate agents. You can find the information
you need to make a confident investment decision.
Step 2 - Know your Numbers
Note: This step primarily deals with rental returns
and does not take a property's annual appreciation or depreciation
into account.
Before investing in property it's important to
do the numbers to know
What you can afford to purchase
Purchase and ongoing upkeep costs
Potential rental returns
Monthly cash surplus or deficit
Once you know all of these figures you can then
decide how much you can afford to spend within your budget, what
rental return you're looking for and whether you will gain a monthly
cash surplus or if you will need to contribute towards its monthly
upkeep.
So what are the common numbers to know and calculate
The Purchase Price
Purchasing Costs - items such as Stamp Duty, legal
fees, real estate agents' commission, legal fees.
Rental Income - If the property is rented to tenants,
how much rent can you charge
Ongoing Costs - Management Fees, mortgage repayments,
repairs and maintenance, letting fees, Municipal or Council rates.
Net Return - this is the end result once you have
accounted for all of the income and expenditure and it will show
if you will have a cash surplus or deficit.
The more properties you calculate returns on, the
better idea you will have of what is available in the market to
suit your requirements. You'll also protect yourself from any surprise
costs. It's wise to be conservative with your calculations and maybe
add in a contingency amount.
Please remember, there may be more costs you need
to factor into your calculations according to your situation
Step 3 - Create your Criteria
Before you go shopping for your investment property
it's important to know exactly what you're looking for so that you
buy a place that suits your requirements. The best way to do this
is to create a list of certain criteria that a potential property
must meet.
You may choose to be stringent on some of the criteria
such as a set limit for the purchase price but then you may be a
little more flexible on other criteria like accepting $10 less than
the expected weekly rent.
So what would you include in your criteria Here
are a few suggestions:
Town population no lower than 10,000
Expected rent at least 7% of the purchase price
Brick house on land, no more than 10 years old
Initial repairs to cost no more than $1,000.
Whatever criteria you choose is up to you but it
gives you control over what you buy and will certainly decrease
the time you spend looking for a property. From carrying out your
research and working out the numbers you should find it easy to
create your criteria. Now you can go and buy the property that's
right for you.
Step 4 - Property Insurance and Management
Like any investment, we always look to minimise
the risk of loss or damage and it's no different when it comes to
property. There are a number of ways to do this including taking
out a suitable insurance policy and finding the right property manager.
Whether you buy a property to live in or rent,
it is potentially at risk for various reasons and so you can insure
the property against these risks. Insurance policies can cover you
for loss in the case of structural damage, theft, flooding and many
other instances.
Landlord insurance policies are also available
for extra cover of instances such as malicious damage, legal fees,
loss of rent etc. So shop around for the policy that's right for
you.
If you are buying a holiday home or a rental property
you might consider employing the services of a Property Manager.
The role of a Property Manager is wide and varied and a good one
can save you a lot of time and money.
They can find new tenants, arrange to have your
property cleaned, collect rent, keep an eye on your property, pay
your bills out of incoming rent and much, much more. Finding the
right Property Manager will pay off rather than choosing someone
who won't look after your property the way you want them to.
It's important to shop around to seek out the best
Property Manager and you can do this by asking the right questions.
A good Property Manager will communicate regularly with you and
be available to address any concerns you might have.
Additional measures to secure your investment include
the local neighbourhood watch, security alarms, window locks and
smoke alarms.
Step 5 - Tracking your Investment
Once you've invested your hard earned cash you'll
want to know how it's performing and what sort of return you're
getting. Again, we're only going to look at rental returns rather
than growth as the growth is only speculative.
Every month you should keep all receipts of income
and expenditure concerning the property. This includes:
Statements from the Property Manager
Bank mortgage statements
Receipts for repairs
Payment receipts for Municipality or Council rates
Any correspondence regarding the property
All we are doing here is tracking the income and
expenditure so we can see what the return is. By tracking the figures
regularly you can see how your investment is performing and this
information can then be filed with your annual tax accounts.
Your accountant will be able to advise you on what
extra records to keep ensuring you get the best annual deductions.
And that's the final step to Successful Property
Investment. All it takes is one step at a time to become familiar
with the process and although there are many other ways and processes
advocated by many other investors the end result is ultimately to
leave you empowered to make the correct investment choices.
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