How to Find a Really Good Investment Property

We all need to invest. Period. Unless we have a job which the salary can go up by at least inflation rate annually, we all need to invest. Otherwise, we would need to work harder in the future to be able to afford the same stuff we buy today. Now, the investment vehicles can be different. As for me, I like investing in property. If you have already read my other articles, I like property investing simply because of the leverage capability ie. the fact that with only 10-20% of my money, I can control 80-90% of asset. And if that asset moves by 8-10% (which what property investing in Australia is averaging over long term), my money grows a lot bigger than if I would invest in shares and other vehicles.

And not just that, investing in property is generally a lot less riskier than if I would invest in shares or commodities trading. I mean, put it this way, everyone needs a roof above his head. Sure, not everyone needs to own a property, however, everyone needs a property to live. And based on this principle, I still think property investing, as a vehicle, is very safe.

“But what about the sub-prime in US? After all property investing is not safe, is it?”, you might ask. Well, from what I observe, it’s not so much about property investing as a vehicle that is risky as such. Rather, it’s what people do with it. It’s the type of asset they buy and the strategy that is used – which most of the time is determined by greed. The greed always kill. For US sub-prime especially, I couldn’t fathom how people could buy properties with 110% leverage. That’s just madness. They borrowed more than what they could afford. They were betting on capital growth alone without thinking about the affordability and serviceability. A lot of people defaulted on their mortgage payment and that’s what caused all the crash and panic.

I still think that if you’re a savvy investor, and not just “gambling” on capital growth alone, but rather making a calculated decision on the type of asset you purchase and properly calculate your cashflow, I reckon you’ll be safe. I mean, that’s what I do anyway that I have been able to ride through the storm because I don’t use that “capital growth alone is sufficient” strategy. I want to make sure that the property I own bleed as little money as possible. And as of the writing of this article, Australian property interest rate is at all-time low ~4%. So, this is a really great opportunity to just pay down the mortgage on the investment properties as much as possible, as well as getting neutrally-geared, if not, even positively cashflowed situation.

Therefore, in this opportunity I just would like to share with you one thing or two on how to find a really good investment property. If you’ve read my other articles I often mention, “everyone can just buy any property”. But really, it’s true, isn’t it? You can just go to realestate.com.au and just pick any property you want. The problem is, mediocre purchase results in mediocre results. And worse, before you know it, you might be bleeding a lot of money buying the wrong property.

What is a good investment property? My understanding of it is easy: it’s a property which gives you at least neutrally-geared cashflow, and it’s located close to amenities and as close to CBD as possible.

Throughout my research, ALL suburbs grow. Sure, some properties grow more than the others. However, if that “high growth” property costs you a lot of money and stress, then there is no point betting on the growth alone. If you look from a long term perspective, every suburb (including the bad ones) grows. So, why do I have to worry about buying properties that are so highly negatively-cashflowed for the sake of growth alone? If I can hold any property for 30 years, it will surely at least double its value.

What I’m worried now is my cashflow position. Especially with current bank tight lending, if you can’t refinance your highly negatively-cashflowed property, you’re stuffed. I have read an article where someone purchased a $800k property, and after renovation, it’s receiving a rent increase of $150/week from $350/week to $500/week. You know what, with all due respect, I would stay away from that property in the first place! While the renovation project can be called successful, the purchase itself in my opinion, is a bad one. Depending how much the buyer borrowed for that property, but a $500/week will never cover the running cost of a $800k property.

So, to buy a good investment property we have to find ways on how to make positive (or at least neutral) cashflow on it. And to do this successfully, it all comes down to the revenue and cost calculation. Remember, don’t worry too much about capital growth just yet at this stage, as I’ve mentioned earlier, all suburbs would have increased in value anyway long term. So capital growth is a 2nd priority for me. What’s more important is if I can hold it that long in the first place.

THE PURCHASE PRICE AND THE RENTAL INCOME RATIO

The very first thing you have to analyse is the purchase price vs rental income ratio. This calculation is called “rent yield”. To do this, simply times the weekly rental income by 52 and divide it by the purchase price.

For example, this is one of the properties we purchased. It’s a house-and-land package and the total building cost after literally every cost calculated was $402,000. The rental income is projected (according to property manager in the area) at $420-$450/week. So let’s be defensive and use $420.

($420 * 52) / $402,000 = 5.43%.

I personally would not entertain anything less than 5% yield. Therefore, if your purchase price is a lot higher eg. the $800k in the story I mentioned earlier, then the you would need an a lot higher rental income. Unless this is the case, leave it alone! Do NOT buy that property as an investment unless you want to start bleeding money out.

THE RENTAL INCOME BOOSTING POTENTIAL

Find a property where there is a potential to boost your rental income. An example is buy 4×2 instead of 3×2 because you can then do room-by-room rental. 4×2 will also bring more rental income anyway compared to 3×2. Buy a new property since you can charge more rental income.

Also, consider buy a bigger land of at least 450sqm, that way you can think of building a granny flat or dual occupancy. Thus, giving you combined income. A dual occupancy house is where you can have 2 houses on 1 title. It’s normally setup as 3×2 and 2×1 or 3×2 and 1×1. If let’s say you rent the 3×2 for $380 and 2×1 for $280, that’s $660/week income for you!

Think of AirBNB? It might give you additional cashflows.

Basically, the cashflow is what allows you to hold the property for a long time. This is what you need!

LOCATION

People rent for location. So make sure you check amenities, transport, schools, churches, etc around the area and how accessible they are from your property. You don’t want to buy too close to these places due to traffic and noise. But you definitely want to give renters convenience. This way you can charge higher rental income and will attract more tenants.

SECURITY AND NOISE

Check how secure and noise the property is. Is it located near big roads? How about the neighborhood? Are they good? Check the kind of people that walk around the area.

CONCLUSION

Property investing is like running a business. And a successful business always have methods to reduce their risks! While the list is not exhaustive, but it should be start for you to start qualifying the right properties for your investments!

Remember, property purchase is a big commitment. You want to make it right! If you have any questions please reach out.