If you’re investing in property, you want to make sure you’re buying a home with the right ingredients for success as a long term investment.
We look at what makes a good investment property.
1. Capital growth prospects
Capital growth is simply the increase in a property’s value over time. It’s one of the main ways investment properties build wealth for landlords over the long term, and that’s why savvy investors seek out investment properties with good capital growth potential.
How do you determine whether a property has good capital growth prospects? It’s hard to underestimate the role location plays in a property’s capital growth potential. Given that some experts estimate that a property’s location accounts for as much as 80% of its value, while the dwelling itself is only around 20%, choosing a property in a desirable area is a good start to finding a quality investment.
This is because one of the key factors that drive capital gains is scarcity. Homes in sought-after locations where land and available property is scarce, such as near the city centre, the beach, public transport or employment centres, often have better capital growth forecasts.
Seeking features that set it apart from others in the area can also add to a property’s appeal and value, like a garden, pool, generously sized bedrooms, or heritage details.
According to REIWA, Perth house prices are poised to increase by 10% in 2022, a rate of potential capital growth that is attracting interest from property investors across the country.
2. Healthy yields
A yield is an annual return a landlord receives from an investment property – in other words, the rental income. Investors can use it to pay down their loan on the property or to supplement their income. It’s one of the most important measures of an investment property’s performance.
How do you select an investment property with a good yield? You can calculate a property’s likely yield before you buy by dividing the annual rent it would generate by its value. What is considered a ‘good’ yield will change from one investor to the next, as investment priorities vary, and some landlords will be focused on capital gains rather than yield. The CBA suggests that investors using yield as a deciding factor when purchasing a property should look for gross yields of 5.5% and over because those rates would indicate a property is being undersold. Conversely, they say properties with gross yields under 4% are overvalued for investment purposes.
The good news for Perth property investors is that Perth house and unit yields are currently some of the highest in Australia. Domain’s March 2022 Rental Report shows that Perth house yields, at 5.24%, are the best in the country, while unit yields, at 5.93%, are second only to Darwin. As good as they are, these figures are city-wide averages; there are Perth suburbs where yields reach as high as 7% or 8%.
3. Low vacancy rates
Vacancy rates are used to express the percentage of untenanted rental properties available for rent at any one time in a particular area. They can help investors determine the level of demand for rental properties in that area. Low vacancy rates indicate a high level of need for rental homes, which can lead to increased rents and eventually even rising sale prices (in other words, capital gains). An investment property in an area with low vacancy rates is likely to command good rent and be easier to keep tenanted.
A vacancy rate of around three per cent is considered the mark of a balanced rental market. Contrast that with Perth’s vacancy rates, which were at an all-time low of 0.5% as of March. REIWA figures show that the Perth vacancy rate has been mostly sitting below 1% since September 2020, a clear indicator of the high and sustained demand for rental properties here.
4. Tenant appeal
A key feature of a good investment property that is sometimes overlooked is tenant appeal. To attract and retain desirable tenants and command good rent, a property needs to be the kind of home they want to live in.
How do you know if an investment property fits the bill? Look for a home with good liveability, one that an owner-occupier would equally like to own and live in. Well-located properties within easy reach (ideally walking distance) of amenities and transport like shops, workplaces, schools, medical facilities, public transport and/or car commuting routes almost always attract prospective tenants. Well-maintained and well-built properties hold their appeal in a competitive market. And appealing features like a second bathroom, a garage, dishwasher, built-ins, modern upkeep and air conditioning help too.
To be a good investment property, the home also needs to suit the area’s demographic. That means understanding who lives in the area (is it older people, singles, families?) and ensuring your investment property meets their needs and desires. Homes in family areas will be easier to lease (and keep tenanted) if they have ample living spaces and outdoor areas. In suburbs with older demographics, single-level homes might be more sought-after. In cosmopolitan inner-city areas that attract young professionals, a two-bedroom two-bathroom unit may be more appealing to renters who share.
If you’re thinking about investing in Perth property or looking for an expert local team to take care of your Perth investment, our specialist property management team can help. Get in touch today.