Nine things to look for when you buy your first investment property

The factors that influence the purchase of an investment property are much more identifiable than what makes a good home.

1. Long-term capital growth. This is at the top of the list because it’s the most important. You invest to make money; it makes sense to make decisions that will mean you make the most money with the minimum effort.

The properties you buy should have the potential to double in value every seven to 10 years. The reason these properties grow faster than others on the market is because the demand will exceed the supply.

2. Proximity to the CBD and lifestyle amenities. Properties close to the CBD are in shorter supply than middle and outer-ring locations, so they will always be in demand. But look for the location within the location — it should be close to lifestyle amenities such as cafes, shops and public transport. Also, people who rent in inner-city areas are more likely to wear periodical rent increases because they are there for the lifestyle. Tenants in outer areas, particularly families, might be more sensitive to rent increases.

3. Classic architectural style or consistency. Land is an important factor in capital growth but so too is architectural style. Suburbs with a melting pot of styles, from fibro shacks to ’60s brick veneer and ’90s McMansions, will never hold their value as well as areas with predominantly classic architectural styles such a Federation and Californian bungalows. Properties not consistent with the style of the area will date quicker and therefore not perform as well in the long term.

4. Ability to add value. Some properties, while not immediately appealing because of décor or condition, might have loads of potential. You might not have the know-how or money to renovate now, but if the property is in good enough condition to rent at the time of purchase (or could quickly and cheaply be brought up to scratch), it’s still worth a look. Perhaps you could rent it out for a few years and renovate down the track. Perhaps you could pull down the house in the years to come, subdivide, and build a couple of units. Don’t immediately write off a property that might have potential to add value. There are opportunities to create depreciation instead of buying it; however, when renovating to add value you need to optimise, not overcapitalise. When adding value you also need to understand the demographics of the area.

5. Reliable rental return. The rental return you get from your investment properties should not only be at the premium end, you should also be able to increase it every year. And, while it is an important consideration when buying an investment property, it is not the most important consideration in a capital-growth strategy. The most important is growth — how much the value of the property will build over time compared with median prices. It is this rapidly growing asset that allows to you to build equity and buy more properties.

Generally speaking, the higher a property’s capital value, the lower the return in percentage terms. In a cashflow-positive strategy, the rule is that the rental return must cover the outgoings. That won’t happen in a capital-growth strategy. But setting rent is a balancing act. You want it high enough to offset your holding costs as much as possible, but low enough that you can attract and retain the right tenants. This is where investors who buy strictly based on positive cashflow can lose out: with tenants who either don’t treat the property well or are the kind who can’t shoulder regular rent increases.

6. Sensible configuration. An illogical floorplan will bring down houses with loads of street appeal and great architectural style. A slap-dash renovation or odd configuration can be very off-putting simply because it doesn’t feel right. The property needs to flow well from one room to the next. Bedrooms next to kitchens don’t work very well, nor does having to walk through a bedroom to get to another part of the property. If buyers and tenants are put off, the demand for this property will plummet. And so will its value.

7. Personality of a property. A property’s personality has something to do with the floorplan, but more to do with the feel of a property. How does it make you feel when you walk around? Is it light and bright or dark and dingy? Does it have a nice outlook through the windows? Does it have appealing features you don’t often come across that make it that little more interesting than the other properties you’ve been looking at?

All these things add up to the personality of a property. We all want to be around people who have magnetic personalities. The same applies to property.

8. General renter appeal. Always consider who will want to live in the property. How desirable will it be to your target tenant? You want a property that is not only easy to rent out, but is highly desired by quality tenants. That way, you will able to get the pick of the rental market.

9. Owner-occupier appeal. Although you should think of who will want to rent your property when conducting your property search, you should also consider if it will suit the owner-occupier market in the area. This will ultimately determine its long-term value because, when it comes time to sell, you will not be limiting your market to investors only.

Melissa Opie is known as "The Property Lady" and is founder and managing director of Keyhole Property Investments and helps everyday investors make decisions tailored to their names. She is the author of Find the Right Property, Buy at the Right Price, which is published by Wiley. This is an excerpt of Find the Right Property, Buy at the Right Price.

For more on buying your first investment property, sign up for Property Observer's free webinar Six Smart Steps Towards Buying Your First Investment Property with property expert Chris Gray this Thursday, March 22, at 12.30pm.