What is the definition of an investment property?
The term “investment property” refers to tulum mexico beach condos for sale purchased with the intention of making a profit. When an owner rents to a resident or a business, this return is known as rental yield. It could potentially be benefits in the future if the property is sold for a profit. Most people buy real estate for both of these reasons.
An investment property’s primary purpose is usually to increase wealth and provide a passive income. As a result, the characteristics you seek in an ideal investment may differ significantly from those you seek when purchasing a home to live in.
Property investment has various advantages, but it’s critical to have a plan and make objective decisions based on what will provide the best profits.
Here are some crucial aspects to consider to guarantee that your investment pays off.
Growth of capital
The increase in the value of a property over time is known as capital growth. Examine the growth-trend indicators for the property you’re considering buying — what is the median sale price in the area? Is it higher now than it was a few years ago?
Our property market research tool is a useful tool for estimating capital growth in places you’re interested in. It includes past sales in the region, demographic information, neighboring schools, and median rental income, as well as a thorough overview of properties and suburb trends across Australia.
This information may assist you in constructing a picture of how your capital gains (i.e., how much money you make based on the property’s capital growth) may evolve over time.
Rental yield and demand
Investors frequently intend to rent out their property in order to earn money and cover expenses. Researching regions with high rental demand and yield is a crucial aspect of determining an investment property’s financial sustainability.
Rental yield is a statistic that determines how profitable a property can be when the predicted rental income is weighed against the expenditures of ownership and maintenance. Mortgage payments, strata fees, council fees, upkeep, and insurance are among them. Ideally, you should have a stable, dependable rental income that covers part of these expenses.
These estimates may be aided by looking into the performance history of other similar properties, such as vacancy rates, average rental yield, median weekly rent, and its prospective growth rate, as well as what sorts of property are in demand with tenants.
The gross and net rental yields can both be determined. The total value of the property is divided by the estimated yearly rent, which is then multiplied by 100 to get a percentage.
For example, a $500,000 investment property with estimated weekly rental income of $500 yields a gross rental return of:
$500,000 / $26,000 ($500 x 52) = 0.052 x 100 = 5.2 percent
The calculation of net rental yield is a little more complicated because it includes all of your costs and fees, including council taxes, strata levies, property management fees, depreciation, and insurance.
Assume the following annual maintenance expenditures, using the same example as before:
- Council: $1200 ($300 per quarter * 4)
- Strata of $2000 ($500 per quarter * 4)
- The property rental rate is $520.
- Property insurance: $1200 (total: $4,920)
The property’s net rental yield would be:
0.042 x 100 = 4.2 percent = $26,000 ($500 x 52) – $4,920 / $500,000 = 0.042 x 100 = 4.2 percent
It’s worth noting that this amount excludes your house loan payments, which vary depending on your circumstances (our repayment calculator can help you estimate this). Furthermore, the following figure is merely an example and is not based on actual property maintenance costs. Costs and estimates may differ depending on your specific situation.
It’s a real estate cliché for a reason, and it’s just as true for investors as it is for the people who live in the property. Put yourself in the shoes of a potential tenant and consider what they will be looking for in a rental. The property will be more appealing to a renter if it is close to public transportation, schools, and other amenities that are common in most people’s lives, such as shops and restaurants.
In a broader sense, a neighborhood’s safety and overall feel are both crucial considerations when determining its growth potential. For example, if the neighbourhood is anticipated to undergo development that will bring additional shops and cafés, or if there are large infrastructure projects in the works that could result in more local jobs, these factors may boost the property’s location’s attractiveness as well as its value.
The kind of property
While your budget will play a big role in determining whether you buy a house or a condo, you need also consider the type of property in terms of location.
In a family-friendly region, for example, a house with a backyard will likely appeal to tenants more than a cramped apartment. Similarly, in regions near universities, where there is typically a high amount of students looking to rent, a modern apartment may find increased rental demand. It’s critical to understand the demographics of the area and make decisions based on that information.
Houses are more expensive to buy and insure, and they may require more upkeep, but they can also command higher rents and have greater capital growth. Units, on the other hand, typically start at a cheaper price point and require less care, but there may be other charges to consider, such as strata fees.
In truth, strata fees are just one of many ongoing maintenance expenditures to consider when considering whether to buy a house or an apartment.
The property’s age
This is a significant component that can influence the cost equation. You want to be sure you don’t acquire an investment property that will put a strain on your finances due to maintenance charges.
Older homes may require more upkeep, but it all depends on their condition – inspect everything, from the structure to the fixtures and fittings. Before you sign a contract of sale, make sure you have professional building and pest inspections.
If you’ve budgeted for it, you might be ready for the challenge of renovating a home that requires minor repairs. However, if it requires extensive improvements, it may not be a viable investment.
The property’s depreciation schedule is another way in which the property’s age affects your finances.
Depreciation on investment property is a computation of how much the value of the property and its contents – such as white goods, carpet, and so on – will drop over time, and how much you might be able to claim as tax deductions1.
Features of the property
Even if you do not intend to live in this property, someone else will. Consider the things that individuals typically seek. A garage, more bathrooms, or a home office space will all help to raise the rental value of the house. The property’s layout and design also make a difference. Is it made with practicality in mind for day-to-day use? Is there any natural light? These are all things that tenants look for, and you should look for them as well when you buy.