What makes A GREAT Investment property?
How is it that some property investors can continually add to their property portfolio, getting increasingly wealthier and wealthier, whereas the vast majority buy a few properties and then can’t go any further? One of the main things that separates the really successful investors from the average investors is the properties they choose to buy.
So let’s look at what makes a great residential investment property.
Firstly, I’m going to assume that, as an investor, your objective is:
“To create a passive income stream to enable me to stop working if I wanted to... and to achieve this without excess risk or stress.”
Then, the following are qualities to look for in a superior investment property:
- High Income / Yield: If you want to grow a substantial portfolio, you cannot have properties that cost you money each month, as that limits how many you can own. If your property covers all costs of ownership (mortgage interest, rates, insurance and maintenance), it won’t put additional strain on your resources, therefore making it easy to own. Over time, when rents increase, a property that covers its costs today, should produce increasingly positive cash-flows in the future, hence helping to grow your passive income stream. This requirement (high income) really is the one requirement that I believe is essential. If a property doesn’t have good income, do not pass go!!
- High Tenant Demand Location: If the property is located in an area that is unappealing to tenants, you will have periods of vacancy, which equates to sleepless nights, which equates to “I’ve had enough of this game – I’m out!!” This jeopardises your investment career. But if the property is in an area that is appealing to tenants, you will easily be able to replace tenants when they leave… this amounts to sleeping at night, and low stress, both of which are distinct advantages! Generally speaking, tenants want to live close to shops, transport links and other services. Close to the city is best, and close to the suburban shopping centres is also great.
- Good Configuration: by configuration, I mean the combination of bedrooms / bathrooms / living spaces, the number of flats in the building, how many floors the building has, this sort of consideration. You want property that will appeal to as many prospective tenants - and future buyers - as possible. Your target tenant market will depend on the location, so different configurations will be suitable for some locations, but not others. For example, generally speaking, a 7-bedroom house is higher risk than a 4-bed house with a 3-bed flat below. A 3-bedroom house is lower risk than 3 x 1-bed flats. A 6-bed flat plus 2 x 1-bed flats is higher risk than 3 x 3-bed flats.
- Upside: If you have the ability to add rental income and value, this can turbo-charge your results, enabling you to get your next property faster. Simple cosmetic renovations can be done quite cost effectively, and add significant rental income. Similarly, turning an unnecessary and large lounge into two bedrooms will add enormous rental income and hence value also. If you can turn a basement into a self contained flat, or if you might be able to subdivide the back yard in the future, all these options represent equity and cash-flow that you can create in future, as your resources allow.
- Low Maintenance / Quality Construction: A property that requires lots of ongoing maintenance takes up lots of your time and effort. If you have to spend lots of time to keep a property going and keep the rent rolling in, you are going to get sick of it, and either stop growing your portfolio or sell. This doesn’t help you to build your wealth! If a property is well maintained, you will have more time to spend with your family, pursuing your hobbies, or continuing to build your portfolio.
If you can buy well maintained, free-standing property with a fee simple title, in a high demand location, with a strong cashflow and the ability to add value, then you are in PROPERTY INVESTMENT HEAVEN!
Now, it is difficult to achieve all of these citeria, but the closer you can to this ideal, the better. Next time you are tempted by a “good investment”, compare it to this yardstick and see how it stacks up.