Use you head, not your heart: Four tips for buying the right investment property

When owner-occupiers and investors enter the market they want to achieve different things.

Owner-occupiers want to buy a property they like and that suits their lifestyle requirements, while investors buy property to make money.  

The problem for many investors is they enter the property market as an investor but they make decisions as a home buyer. They develop an investment strategy based on what they like and let their heart take over the decision-making when it really should be the head that’s in control.  

Unfortunately the location and features that appeal to you on an emotional or lifestyle level may not be those that stack up on an investment level. Here are a few tips to help you make clear-headed decisions.

1. Don’t buy near your own home 
   
   Many investors buy close to where they live because they like driving past the property, admiring their investment and keeping an eye on it. The problem is that many investors live in areas with strong demand from owner-occupiers, but little demand from tenants.  
   
   What’s more, owner-occupier strongholds are often some distance from the infrastructure tenants look for, such as public transport, shopping and entertainment precincts.  
   
   
2. Don’t fit out the property according to your own tastes 
   
   Too many investors buy a property and renovate it according to their personal tastes. For example, installing granite bench tops and expensive appliances in the kitchen, or putting a spa in the bathroom. This is fine if it’s your own home, but it’s a potential waste of money for an investment property.  
   
   Tenants rent for primarily for location, proximity to infrastructure, and price. There’s little point spending thousands on items that tenants don’t need — particularly when those items are depreciable and will lose value over the time you own the property.
   
   Instead of focusing on expensive fittings and fixtures, focus on buying a property with strong capital growth potential, located in an area where land values are driven by strong ongoing demand from owner-occupiers and investors alike.  
   
   
3. Don’t buy where you like to holiday
   
   It’s one thing to fall in love with a holiday spot, but quite another to buy there and expect it to perform like a prime investment location. Most holiday homes are owned by people who don’t live there full-time. When finances are tight, many owners will sacrifice their holiday home so they can hold onto their family home.  
   
   If you’re forced to sell, you may not be the only one. The more properties for sale in a particular area, the harder it will be for you to achieve your desired price. Worse still, you may be
   unable to sell at all.  
   
   
4. Don’t pay an emotional premium 
   
   When you fall in love with a property, you may be prepared to pay more than its true market value, to be sure of securing it. If it’s going to be your family home, overpaying may be justified, because you’re buying for lifestyle reasons.  
   
   If it’s going to be an investment property, however, overpaying doesn’t make sense. Not only will you have to take out a bigger loan and pay more interest, but you’re eating into the profit you’ll make when you eventually sell. That’s not an investment; that’s a millstone around your neck. Research the market before throwing your hat in the ring, then set a limit and stick to it.

MARK ARMSTRONG is a director of ratemyagent.com.au, Australia’s number one real estate agent rating website.

This article was originally published on Property Observer in September 2013.