Welcome to Property 101 and today we’ll discuss – What to consider when buying an investment property and how to buy an investment property in Brisbane.
How to buy an investment property in Brisbane?
For many of us, investing in property can be a smart financial decision, but it’s important to approach it with a different mindset than buying a home. While you want the property to be in a good location and have potential for growth and a solid rental return, it’s important to remove emotion from the decision as much as possible. It’s important to think like an investor and consider the longterm goals and strategies behind successful property investment. In this blog, we’ll describe ‘How to buy an investment property’ by exploring the key factors to consider when choosing an investment property in Brisbane, from location and property type to rental demand and cash flow. Whether you’re a first time investor or looking to expand your portfolio, these tips will help you make a smart investment decision when it comes to buying an investment property.
What is an investment property?
An investment property is a real estate asset that you purchase with the main intention of generating a financial return. This return can come in the form of income (rent) or capital gains (increase in value over time). Unlike buying a home to live in, the main objective of an investment property is to grow wealth and generate passive income. This means that the criteria for choosing an ideal investment property may differ significantly from those of your home purchase.
What is capital growth?
Capital growth refers to the increase in the underlying value of an investment property over time and is very important as it protects your investment against inflation. By purchasing a property in an area where capital growth has historically been strong, investors can maximise their capital gains over the medium to long term. When considering how to buy an investment property, it’s important to research the growth indicators for the suburb and the type of property you are considering buying, such as median sale prices and suburb trends, to determine the potential capital gains over time. While there is always a risk that a property’s value may decrease, buying a property located in a suburb that has had a strong history of capital growth as well as understanding the fundamentals of supply and demand, can increase the likelihood that you will experience capital growth in the years ahead.
What is rental demand and yield?
Rental demand refers to the level of interest and demand from potential tenants for a rental property and is affected by many factors such as location, the features of the property and of course, the state of the rental market at that time. A high rental demand usually results in a low vacancy rate and higher rental prices, which can increase the rental return/yield for the property owner.
Rental yield, on the other hand, is the return on the investment that a property owner receives from renting out their property. Gross rental yield is calculated by dividing the annual rental income by the property’s value. Net rental yield is a more accurate estimate of the return, as it takes into account other costs such as property management fees, council rates, Urban Utilities, maintenance, land tax and insurance etc.
When considering how to buy an investment property in Brisbane, it’s important to consider both rental demand and rental yield, as it impacts the property’s overall return.
What is cash flow?
Cash flow refers to the movement of money in and out as a result of your investment. For property investors, a positive cash flow means the rental income generated from the property exceeds the outgoings, while a negative cash flow means the opposite. Negative cash flow may require you to put in additional money to cover the outgoings on a monthly basis, although you you are anticipating of course to make a long term profit, as the rental return increases over time and from capital growth – which is where the real money is made.
It’s important to calculate all the holding costs, including mortgage repayments, council rates, Urban Utilities, body corporate fees, land tax, property management fees and maintenance costs, to ensure you can pay the bills as and when they arrive. It’s also essential to take into account potential changes to the income and expenses, such as increased interest rates, rental vacancy, or reduced taxable income due to changing work circumstances. Miscalculating cash flow can lead to significant financial stress. Therefore, investors should seek advice from their accountant before buying a property and try to fully understand the cash flow numbers. Finally, if an investor expects to have a net rental loss, they may be able to apply for a PAYG withholding variation from the Australian Tax Office to improve their cash flow. Please speak to your accountant about this if you believe you are short of cash and worth considering.
Where should I buy an investment property in Brisbane?
When purchasing an investment property, it’s really important to conduct thorough research before purchasing, especially if it’s outside of your home town, suburb or state. One of the most critical factors to consider is the property’s location. The cliché ‘location, location, location’ exists for a reason. To ensure higher returns, it’s vital to invest in a suburb that is close to key sought after amenities such as cafes, shops, restaurants and parks. Additionally, buying in a suburb dominated by homeowners is ideal, as it often outperforms suburbs with a higher investment ownership. Also consider the proximity to public transport, healthcare, childcare, education and other amenities that will impact the amount of rent available to be charged.
What type of property should I purchase for investment in Brisbane?
When it comes to deciding what type of property to purchase for investment in Brisbane, it’s important to consider the location and demographics of the area. A house with a backyard may be more appealing to families in a family friendly suburb such as Ashgrove, Bulimba, Paddington and Bardon, while a modern apartment may see higher rental demand in areas near universities with a high volume of students such Toowong, Brisbane City and Kelvin Grove. Additionally, houses can obtain higher rents on average and traditionally have higher capital growth, but require more maintenance and are generally more expensive to buy, maintain and insure. Units and townhouses on the other hand, start at a cheaper price point and require less maintenance, but may have additional costs such as the body corporate fees – administration and sinking fund contributions.
The best investment properties depend on your financial position and goals, with different properties suiting different people. Finally, whether you choose to invest in a house, unit or a townhouse depends on your circumstances. Ultimately, the best type of property to purchase for investment will depend on your budget, investment goals and the demographics and location of the suburb you have chosen.
What should I consider regarding the age of an investment property?
When considering an investment property, the age of the property is an important factor to take into account. This can significantly impact your financial bottom line. Ongoing expenses for maintenance and repairs are common with investment properties, so purchasing an older property could potentially drain your finances. However, the maintenance required for an older property largely depends on the condition it’s in, so it’s crucial to thoroughly inspect the structure, fittings, and fixtures before making a purchase. An experienced Buyer’s Agent Brisbane and a professional building and pest inspector can help uncover any issues that may arise in the future.
Renovations are another consideration when it comes to older investment properties. Minor renovation and maintenance work may fit within your budget, but major renovations could result in over capitalisation, making the investment unprofitable. Additionally, the age of the property affects its depreciation capability, which is the calculation of how much the value of the property and its contents will decrease over time. This can impact your tax deductions, so is also important to discuss this with your accountant before purchasing an investment property.
What features are important for an investment property in Brisbane?
There are certain features that can make a property more appealing to tenants and increase its rental appeal and therefore value. First and foremost, you want to ensure that the property appeals to a broad range of tenants, from young couples to families, students and retirees. Look for properties that offer that little something extra, such as a second bathroom, a lockup garage or a home office. These features will go a long way in attracting potential tenants.
In addition to the physical features of the property, consider the layout and design. Is it designed with practical everyday living in mind? Does it have natural light? These are all things that tenants often look for, so you should too before making a purchase.
Keep in mind that the features that are important to you may not be as important to your tenant. Therefore, it’s essential to choose a property with features that will appeal to the type of tenant you want to attract. For example, an internal laundry, balcony, air conditioning in very important in Brisbane, car parking and extra storage is always in demand, especially for investment apartments.
As a Brisbane Buyer’s Agent we love to see an investment property with the following:
- Air conditioners
- Built in wardrobes
- Ceiling fans
- Security screens
It’s also worth noting that you can make changes to a property to boost its rental income potential. Small renovations like updating the bathroom fixtures or giving the property a fresh coat of paint can make a significant difference. In summary, it’s crucial to choose a property with features that appeal to a broad range of tenants and to consider the layout, design and physical features of the property. Remember, the goal is to make the property as appealing as possible to potential tenants to maximise rental income potential and the attractiveness of the property when you come to sell one day in the future.
What does ‘thinking long term’ mean when it comes too investing in property?
Investing in property requires a long term perspective. It’s not a short term investment, but rather a commitment to building wealth over time, often decades. This means you need to plan for the future and be prepared to hold onto the property for an extended period. You should be able to budget and maintain the property over the length of ownership.
How to buy an investment property – number one it’s important to remember that property investment is a journey, not a destination. It takes time and patience to build wealth through property investment. You need to be prepared to weather the ups and downs of the market, make smart decisions, and stay committed to your long term goals. By thinking like this and taking a strategic approach, you can build a successful property portfolio and achieve the financial freedom you desire.
How can a Buyer’s Agent Brisbane help with purchasing an investment property in Brisbane?
As an experienced Brisbane Buyer’s Agent, we can assist you in choosing the perfect investment property by providing valuable insights and recommendations based on our expertise in the local real estate market. As discussed above, when investing in property, it’s important to consider your specific long term goals and strategies, ‘think like an investor’ and prioritise factors such as capital growth, rental demand, return and cash flow. Thorough research and consideration of location, amenities, and demographics are also essential. We can help you make an informed decision for a successful property investment.
If you are considering purchasing a home or investment property in Brisbane or South East Queensland and would like the assistance of an experienced Brisbane Buyer’s Agent that can help you find the perfect property, that meets all your requirements for the right price, please don’t hesitate to contact us.
We look forward to hearing from you.
Sam Price, Buyer’s Agent and Director – Templeton Property.