Part 5: How to select an investment property
Now that you have worked out what you can afford and you’ve done your homework, it is time to get down to the business of selecting an investment property.
This is what you should take into consideration:
1) Make a business decision
You must make a business decision about the property you select, not an emotional one. You don’t even have to like the property yourself – so long as it is perfect for your target market.
2) Don’t overcapitalise
You may feel the urge to renovate the property to make it more attractive before you rent it out. Applying a fresh coat of paint can do wonders but don’t make the mistake of spending too much. If you do then it could be difficult to obtain a rental that gives you an acceptable return on your capital or to sell at the price you want. The prices of properties in an area vary within a tight range and buyers tend to view properties that are priced higher than the average with suspicion. As a rule of thumb, 10% of the initial purchase price should be the maximum you spend on renovations.
3) Minimise the time you spend on the property
Put the property in good repair before you rent it out. Not only will this make it more attractive to potential renters but, more importantly, it will mean your tenants are less likely to call you with complaints and requests for things to be fixed. It’s a good idea to pay for a building inspection before you decide to buy too.
Avoid investing in properties that require a lot of time to manage, such as holiday homes.
4) Ensure the rental yield is healthy
Make sure that the property you buy will give you a rental yield (annual rental income/price paid) that makes the whole transaction worthwhile. A yield of 5-6% in the first year is fair but if you do enough searching you can find properties yielding 7-10% per annum. It isn’t worth trying to time your investment for the business cycle; buy the property on its own merits.
5) Select a great area for investment
Your investment time horizon should be at least 5 years so the area you choose should be one that is likely to be attractive in the future. You should look at suburbs – preferably in cities – that are close to jobs and schools, not just at suburbs that you know because you live nearby.
Good indicators of future potential would be a suburb that is gentrifying or where there is a move into the area of younger people, who tend to have more disposable income than the older crowd, and so can spend more on upkeep.
6) Go for sought-after property types
In an average suburb, a townhouse or apartment usually offers superior security to a free-standing home. Since security is a major consideration in SA, townhouses or apartments can be more attractive to renters for this reason. Also, renters usually don’t maintain gardens as well as owners do, so having the communal gardens taken care of by the body corporate is a big plus. Of course, if you do decide to buy a unit in a sectional title complex you should ensure that the finances of the body corporate are in order, that there are no special capital levies planned, and that the complex is well run.
We hope the series has inspired you to seek your fortune as a property mogul. Good luck with your investing!
David de Waal (CA(SA))
Steeple – Low cost estate agents