03 Aug How to Spot the Right Investment
With so many properties on the market, and a seemingly limitless amount of information available, how do you decide which investment is the “right” investment? Here are a few crucial points to finding the best investment for you, and avoiding potential “duds.”
1. Debt Servicing
The issue of debt servicing is more complicated than it may appear. Of course, you need to be able to sustain an acceptable lifestyle while paying off your mortgage and you should have access to additional capital for unexpected circumstances. But investments do not remain static, and the amount of money required to service your mortgage debt may vary as time goes on. For example, part of your strategy may be to refinance your debt after a period of time, leverage your existing equity into another investment, or sell the property entirely. Break down your debt servicing requirements into short, medium and long-term numbers, and make your decision based on each of these categories.
2. Location, Location, Location
Again, this topic is often oversimplified. It would be great if property investment were as simple as finding a good property in a specific area and getting a tenant, but any experienced investor will tell you that it’s never that simple.
Location is all about an analysis on two fronts – will the property be worth more over an extended period, and are there enough tenants looking to rent in the area for short-term cash flow?
Fortunately, the answer to the first question is almost always yes. Property prices in Australia have been relatively (as compared to other markets) consistent in their upswing. Try to find areas that are up and coming or fit into the pattern of urban sprawl. In other words, if people can’t afford to live in a particular area, what will be their second choice? It’s this area that is most likely to become the next big thing.
As for tenants, this measurement is relatively easy thanks to the Internet. Go onto real estate websites, and see how many properties are available in the local area, and check out a few open homes. How many people attend? Are the properties still available the following week?
If both of these numbers stack up, it may be a good investment.
3. Think Long Term
When looking at an area, dig deeper than just the current state of the neighbourhood, where schools are located and how busy the nearest shopping centre is. Think about, as the population inevitably grows, what other facilities are likely to be required, and which ones are likely to be upgraded. Are there plans in place to introduce other means of public transport? Is the local shopping centre likely to get a facelift if enough people move into the local area? Does the local school have enough room to cater for a 2 to 3% population increase, or will it be expanded?
By thinking about what the area may look like in a few years time, you can see an opportunity for what it really is. Many people have made excellent returns by purchasing property near facilities that were in urgent need of an upgrade, and received one. To achieve significant returns, it’s important to think about more than just the immediate reality.