Financial attributes EVERY investment property should possess

If you’re thinking about taking the leap from owner-occupier to landlord, knowing what to look for in an investment can be daunting. However, if you keep the following key points in mind, you’ll be well on your way to building your own successful property portfolio.

Here’s a list of 3 financial attributes every investment property should meet:

1. It should be affordable right now

Before you begin looking at potential properties, the first step is to create a budget to determine what you can realistically afford. Your budget is essentially dictated by your borrowing capacity (based upon your income and expenses) and the amount of deposit/equity you have available.

Your budget should also include a financial ‘buffer’ to cover unexpected outgoings that may arise which you need to pay for at short notice. For example you may experience a break in rental income between vacating and new tenants. Regardless of whether you have an income from the property, the mortgage still has to be paid, along with other regular costs -which can be minimal when you receive an income, but should be factored in when considering your limitations.These regular costs may include body corporate fees (depending on your property), council rates, maintenance and the like.

It’s also worth researching your insurance options, so you can find suitable, affordable cover that will protect your investment. There are several types of insurance that may apply and we have produced a fact sheet to help you assess what suits your situation.

Read our fact sheet Insurance: What to consider as an investor here.

2. It should be affordable in the future

With interest rates at a remarkable low, it can be tempting to buy the most expensive investment property you can afford, with a view to maximising your returns, but it’s vital to stop and consider whether you could maintain the repayments if interest rates rise.

Consider whether an increase of even half a percent could increase your repayments beyond what you can afford, particularly if you’ve purchased an expensive inner-city property or you’re building your portfolio with more than one investment concurrently. It’s essential that before committing to buy, you ensure that you can afford the investment if rates were to rise by, say, 2 per cent.

On a loan of $800,000, a rate rise of 2 per cent could see you paying up to an extra $1000 each month. Whereas, if you bought a less expensive property and borrowed just $500,000, the 2 per cent hike would only add around $600 to your repayments. Any interest rate rises will hit you even harder in the event of a vacancy, so ensuring you’ve chosen an area with a low vacancy rate, and a property which is desirable to renters, is key. There are a number of online calculators you can use to estimate what your repayments will be under various scenarios or, alternatively, just give us a call and we will be happy to advise you.

3. It should be projected to grow in value

Choosing a property as an investment involves a different thought process to choosing where you’d like to live. It’s about balancing the risks and rewards of the investment, and should be undertaken with your head, not your heart. Always remember: it’s a business/financial decision not an emotional one. You’re not going to be living in the property, it doesn’t have to suit your life-style exactly. It is to enable you to grow your wealth and secure your financial future.

When considering a particular investment property opt for a solid growth area in close proximity to workplaces or universities, or commutable distance to a major CBD, to both lure prospective tenants and maintain your resale value. Stay away from the latest fad suburbs, as this can be risky.

With a heavily geared property be aware of your loan to value ratio (LVR). If a property slump sees your investment drop in value - below the amount owing on the mortgage - you could run into major problems if you wish to refinance, not to mention needing to come up with the difference if you have to sell.

Whether you are already an investor, or just getting into the market, if you would like further information and advice about how to structure your finances, how and where to purchase quality properties, and how to build a well-performing property portfolio we would be happy to advise you. Please contact the team at Multifocus Properties and Finance for an obligation-free chat on 1300 266 350.