9 things to consider before buying investment property

A drastic undersupply of housing to accommodate Australia’s growing population has led to extremely low rental vacancy rates. The national vacancy rate is hovering around 1%, and in some places it is even lower.

Investors are beginning to come back into residential property, believing it to be a landlord’s market. But experts are urging caution, as house prices are expected to fall this year, particularly at the lower end of the market.

Here are some points to consider before diving into the residential housing market.

1. Understand that the undersupply is not going to be addressed quickly.

Angie Zigomanis, industry analyst and economic forecaster for BIS Shrapnel, says there are simply not enough properties for rent, which is forcing up rents and yields.

“There is a deficiency of stock in most capital cities," he says, "with Sydney most of all."

Despite strong construction in capital cities such as Melbourne, developers have still not been able to meet demand caused by Australia’s fastest population growth since the baby boom of the 1950s and ‘60s.

2. Understand that the best buying time has passed

Matthew Bell, economist for Australian Property Monitors (APM), says the best time to buy was a few years ago, when interest rates and prices were at their lowest.

Louis Christopher, managing director of property adviser and forecaster SQM Research, agrees now is probably not the best time to get into the market, especially as prices aree likely to level out or fall over the next year.

3. Think about the movement of interest rates

With interest rates at 4.75% and many experts predicting they will rise even further, investors should be wary of biting off more than they can chew.

4. Check relative yields

While yields on rental properties are high, Christopher suggests would-be investors compare the higher yields on such alternative investments such as fully franked shares.

5. Realise that vacancy levels are not low across the board

“There are significant areas where vacancies are rising," warns Christopher. Do your research, because if you buy an investment property in an area with a vacancy rate of more than 3% it will be almost impossible to raise the rent.

6. Consider impact of banks requiring higher loan-to-valuation ratios

"By default, this will reduce the number of borrowers [in the lower end of the market]," Christopher says. In turn, this could be detrimental for prices.

However, although Bright says higher loan-to-valuation ratios will prevent many first home buyers from entering the market, that could strengthen the property market because there would be fewer forced sales.

7. Don't overlook the effect of the cutting of concessional super contribution caps.

The reduction of the caps on these contributions, which include salary-sacrificed, SG and tax-deductible contributions by the self-employed, is expected by some financial planners to encourage more investors to gear non-superannuation investments including residential property.

8. Choose your investment buy carefully

Bright says the best buys for investors are a step up from first-home buyer points. For example, he says the best buys in Sydney are those of $750,000 and above, in particular the $1 million to $2 million bracket.

9. Think about what will appeal most to tenants

Bright says in general, quality properties are near transport, activity centres, shops, entertainment centres and business centres, particularly in cities.

"Other factors such as a secure building, pleasant outlook and a balcony are highly desirable," he says, "while off-street parking can be a deal-maker or breaker, particularly in the very busy suburbs close to the city centres."

He warns investors to stay away from areas with an oversupply of properties for rent, unless they can secure sites with a point of difference, like a penthouse with knockout views.