I actually think top five is difficult but we’ll give it a red hot crack here!
Investing in rental properties can be a lucrative venture when done wisely. Here are the top five rental property investment tips to help you recognise a good rental property and avoid investing in a bad one:
1. Location, Location, Location:
- Good Property: A prime location is paramount for rental success. Look for properties in neighbourhoods with low crime rates, good schools, proximity to public transportation, shopping centers, and job opportunities. A desirable location often means higher demand from tenants and potentially higher rent rates.
- On the flip side, a property in a declining neighbourhood with a high crime rate, poor schools, or limited amenities may be a red flag. Also, consider the property’s proximity to noisy or undesirable features like airports, highways, or industrial areas.
2. Positive Cash Flow:
- Good Property: This is always the ultimate goal, but here in Australia we are also pretty keen on negatively gearing, and sometimes it’s just difficult to find positive cash flow properties. So, calculate the potential rental income and expenses accurately. In an ideal scenario you will be seeking positive cash flow, meaning the rent covers all expenses, including the mortgage, rates, insurance, maintenance, and property management fees, with something left over. The reality is likely to look somewhat different but of course, there are so many variables including where you buy, what deposit you have, interest rates, and of course projected rent returns.
- If the property is projected to have a negative cash flow where expenses outweigh rental income, sometimes that’s perfectly fine, but these are questions for your accountant and mortgage broker so develop these relationships and consider the purpose of the investment – long term, capital gain or ROI, or a mix of both. One of the biggest mistakes we see new investors make is overcommitting for the sake of investing now, where the property requires a significant regular contribution which fast erodes their finances and causes undue financial pressure. Saving a little longer, paying a little more off your own principal place of residence, and buying in more affordable area with higher ROI initially can all help. And for me, the make or break ultra important aspect is good property management.
3. Property Condition:
- Good Property: Look for properties in good structural condition or those with manageable fixer-upper potential. Well-maintained properties typically attract responsible tenants and require fewer costly repairs. This can not be understated. In most situations, a better property equals better tenants and that’s a huge benefit to owners. And we are not talking about exclusive property here, by better we simply mean well presented and maintained, despite any plans for developing the site. There are cost effective strategies to minimise expenditure and maximise presentation.
- Most certainly avoid properties with significant structural issues or those in need of extensive renovations unless you have the expertise and budget for such projects. Hidden problems can quickly drain your finances so, despite what any agent says, always insist on a building inspection. I can recall so many times where investors from interstate have purchased in South Australia without a building inspection and it has ended in tens of thousands of dollars needed to remedy. Don’t be caught out, it’s an important safety measure for your investment journey.
4. Market Research:
- Good Property: Conduct thorough market research to understand the local rental market. Analyse rental rates, vacancy rates, and trends in the area. A healthy rental market with growing demand is a positive indicator. Speak to agencies in the area, if you are nearby walk the area and chat with neighbours, speak with local government elected members about the area and their thoughts. While many of these may not be property professionals they often have insight into areas. And fore mostly, speak with a professional Property Manager. This is your chance to begin the interview stage, listen to who really knows the area, who has factual information and who instills faith through conversations.
- Be cautious of areas with high vacancy rates or declining property values. An oversaturated rental market can lead to difficulty finding and retaining tenants which is certainly good advice traditionally but at the moment in South Australia this is unlikely. We are still facing a significant property shortage so chat with a Property Manager and ask them to inspect the property for or with you.
5. Due Diligence:
- Good Property: Perform a comprehensive inspection and evaluation of the property. Hire a qualified inspector to identify any hidden issues. Research the property’s history, including any additions.
- Steer clear of properties with unresolved structural deficiencies that would incur substantial costs to rectify. Skipping due diligence can lead to costly surprises.
Instant Deal-Breakers for Landlords:
There are several items that can instantly signal to a landlord that they should not purchase a property:
- High Crime and Safety Concerns: A property located in a neighborhood with consistently high crime rates or safety concerns should be avoided. The safety of tenants should be a top priority.
- Economic Decline: Properties in areas experiencing economic decline, such as population loss or rising unemployment, may face difficulties in attracting and retaining tenants. This happened a few years ago for investors buying close to mines that then closed. Investors were left unable to rent properties or having to substantially reduce rents. My advice is always buy in known metropolitan areas for the first couple of properties, after that you might like to be slightly less conservative but set up your portfolio’s buoyancy first.
- Environmental Hazards: Properties with environmental hazards like asbestos, mold, or lead paint can pose health risks and lead to costly remediation efforts. Now many of a certain age have one type of asbestos but a building inspector can guide you through this. More of a concern here in SA is most likely any other potential environmental hazards or EPA concerns.
- Unmanageable Repairs: If a property requires extensive and costly repairs that you cannot afford or manage, it’s best to pass on the investment.
- Significant Negative Cash Flow: Any property that is expected to generate negative cash flow consistently needs to be carefully assessed against your personal financial position, as it may lead to financial strain.
In summary, recognising a good rental property involves assessing location, cash flow, property condition, market dynamics, and conducting due diligence. Conversely, signs of a bad rental property include undesirable locations, significantly negative cash flow projections, poor property condition, adverse market conditions, and issues that compromise safety or require unmanageable repairs. Careful evaluation and research are essential to making sound rental property investments.
At Rental Property Network we are here to help so reach out to any of our team on 8285 9125.