Due diligence is essential before you invest in a rental property. Make sure you don’t miss a trick with these savvy questions:
1. What’s being built nearby?
New infrastructure projects can be beneficial or detrimental to your investment property. Find out what’s being planned and when it’s due for completion by logging onto www.infrastructureaustralia.gov.au. This has links to all state infrastructure planning departments.
2. What’s it worth?
A property’s selling price doesn’t mean it’s worth it. Invest in a property valuation – usually starting at around $350 – to assess the property’s true worth and then use that to negotiate on the price. Appointing an independent and certified valuer to assess the value of a property before buying or selling can help investors negotiate the best price, reduce risk and save money.
3. What’s happening in the local market?
What’s happening in the local area can directly impact the property market – either negatively or positively. The best way to find out? Get out there yourself. Go to the local retail strip, look for the standard and style of retailers there and assess whether gentrification has taken place or is about to. It’s also wise to look at local demographics, crime rates and employment drivers in the area – take a look on the Australian Bureau of Statistics’ website, www.abs.com.au.
4. What’s the rental potential?
Just because an agent says a property will earn $400 a week in rent, doesn’t mean it will. Use property portals such as www.domain.com.au and www.realestate.com.au to get a realistic idea of rents on comparable properties and ask an independent company to do a rental appraisal. Properties are often under or overpriced and a rental appraisal will give you an accurate picture.
5. Capital gains or rental return?
You need to consider whether you are chasing rental returns or capital gain and in the case of multiple investments, it should be the latter. The rental income will help you hold the property but it won’t help you buy again. Capital gain should be, in the early stages of investment, top of your list because it will allow you to buy your second and third property. If you look at high rental return and low capital growth, you’ll be sitting there a long time before you have any equity to do something else.
6. Is there competition?
A market saturated with investors will reduce your chances of successful rental returns. This will also create issues around capital appreciation. Contact the local council to find out what percentage of homes are owner occupied and exercise caution in big apartment blocks. You must check that the spot isn’t an overused rental area. If you’re buying in a large block, you can end up with both rental and selling competition if the market gets tough.
7. What’s included in the title search?
Don’t assume everything is included in the sale. Make sure you identify what’s for sale – including parking spaces and storage facilities – and ensure this is reflected in the title search. Sometimes developers don’t update things and if this happens, it can crash a contract and you could lose a lot of money. The best way to avoid this is to ask for a Community Management Statement, which tells you the allotment of the car parks and storage and ask your conveyancer or solicitor to include it in the contract.
8. What’s the state of the accounts?
Properties on strata plans incur a monthly maintenance charge, which is deposited into a sinking fund and used to pay for the lifts, grounds and carpets. Ask to see the Body Corporate Disclosure (it’s a legal right), which outlines exactly what’s been spent and what works are planned. Look at the minutes of strata meetings – these will tell you whether there are any structural problems such as concrete cancer or broken lifts. With the sinking fund, check to see how much is in it and whether it covers proposed work.
9. Who’s your target market?
It’s essential you identify your potential tenants and know what they would be looking for in a rental property. If you’re looking at a property in a university town, you should be looking at a multiple occupancy homes near transport and amenities. If, on the other hand, you’re going for the family market, look for a large home, with a garden and spacious communal area.
10. How much work is it for you?
A potential rental property should be good to go – taking on one in need of renovation will only delay the time to get to market. At the most, allow for paint work and furnishing and steer well clear of homes in need of structural improvements – you’re likely to lose a month’s rent before you even have tenants. Small, paved gardens make for easier maintenance and make sure you factor in the cost of a management company to take care of day to day running.
To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.