Compromise is one of those actions we can all adopt for a better life. However, when it comes to purchasing an investment property, what can we compromise and what can’t we compromise, is a very different story.
In line with the macro and micro fundamentals required to make an educated investment property purchase, which minimise risk and maximise potential return, there are a few factors that should never be compromised on, including:
Owner-occupancy rate within the selected suburb.
You would never want to compromise or overlook the owner-occupancy vs rental percentages in a suburb when looking to invest.
A suburb is broken down into owner-occupiers and renters. Astute investors purchase into suburbs with an owner-occupancy rate of 70%, and a rental rate of 30%. Through the COVID-19 pandemic suburbs that were heavily weighted towards renters typically saw a decline in rents such as in inner-city locations that were heavily dependant on hospitality, international students, travel and visitors. Whereas the suburbs that held strong through the pandemic were those suburbs more weighted towards a higher owner-occupancy rate.
Yields and vacancy rates.
This is another fundamental that should not be compromised. Generally, you are seeking around a 5% yield and a vacancy rate below 3%, which indicates a balanced market. If yields and vacancy rates within a suburb are unsustainable it may lead to a poor purchase with capped growth potential.
Being negligent when it comes to revising the upcoming infrastructure projects on a macro and micro level is another crucial mistake when it comes to an investment property purchase.
Investors should understand what infrastructure projects are being rolled out in the selected suburb and state now and in the years ahead. Usually, areas with new leading infrastructure projects increase the demand in the suburb for example new transport links, superior amenities and schools.
It's crucial to assess what industries the renters in any given suburb work in. A suburb that has renters spread across many sectors of the economy is favourable. Suburbs that are heavily weighted toward one or a few sections have a greater risk of falling in rent value, when a recession hits or market conditions change.
The affordability ratio is established by what an individual chooses to pay on their mortgage and the disposable income left over. A good gauge is around 25% of household income spent on the mortgage, whereas 30% or above often indicates the ratio is not ideal.
As is always the case, the property is an investment property, meaning you should be basing your decision on the numbers, not emotion. Always endeavour to enter the market when it makes sense to you.
The Next Steps
Looking to get the property investment conversation started?
Or, just looking to stay in the loop?
Warren Jacobs - National Business Development Manager at Meridian Australia
P: (02) 9939 3249
Disclaimer: When considering purchasing a property, it's always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your circumstance.