10 questions you must ask before buying a rental property

By MoneyQuest
In Investment

Investing in property can be exciting plus a great way to increase your wealth and cash flow. To ensure you make the right choices, ask these questions about any rental property you are looking at buying.

1. What is being built nearby?

Any new infrastructure projects can change an area completely, both positively and negatively. Do your research to find out development and infrastructure plans in your area and when it will be completed through www.infrastructureaustralia.gov.au. Once you know what is being built, do some research to see how similar projects in other areas impacted property values, demographics and decide if it’s right for you.

2. What is the property worth?

To determine the true value of a property you need a property valuation. A property valuation can be different to the selling or market price set by the agent. An assessment by an independent and certified valuer before buying or selling can help investors negotiate the best price, reduce risk and save money. It’s typically only a few hundred dollars.

3. What’s happening in the local market?

Go to the local area and do research to see what it’s really like. Check out the shops, the retailers, assess the residents, demographics, crime rates, employment, transport, facilities, schools and other factors people typically look at when buying a home. These are the same things your tenants will be assessing when renting from you. You can check the statistics of your area on on the Australian Bureau of Statistics’ website, www.abs.com.au.

4. What is the rental potential?

Just because an agent says a property will earn $500 a week in rent, doesn’t mean it will. Check the rent of comparable properties in the area on www.domain.com.au and www.realestate.com.au and ask an independent agent to provide a rental appraisal. The agent selling the property may not be the same as the agent who will rent the property and it’s in their best interests to sell it at the highest possible price. Attractive rents help with the sale. Get independent advice to ensure you aren’t being taken for a ride.

5. Capital gains or rental return?

Why are you investing? Is it for rental returns or capital gains? Rental income will help you hold the property but it might not increase in value as quickly to help you buy again. Capital gains will increase in value quicker allowing you to buy your second and third property sooner. If you look at high rental return and low capital growth, you’ll be sitting there a long time before you have any equity to do something else. Be clear on your investment strategy.

6. Is there competition?

A market saturated with investors will reduce your chances of successful rental returns, which in turn creates issues with capital appreciation. Contact the local council to find out the percentage of owner occupied homes and exercise caution in big apartment blocks. You must check that the spot isn’t an overused rental area. If you’re buying in a large block, you can end up with both rental and selling competition if the market gets tough.

7. What’s included with the sale?

Don’t assume everything is included in the sale. Check the contract carefully to make sure what you think you are buying is documented. For example, items like storage areas and cages or car parking may be on a separate title and not sold in conjunction with the apartment. Your solicitor or conveyancer should be able to help out with more information here.

8. What’s the state of the accounts?

Properties on strata plans incur a monthly maintenance charge, which is deposited into a sinking fund and used to pay for the lifts, grounds, pools and maintenance of common areas. Ask to see the Body Corporate Disclosure (it’s a legal right), which outlines exactly what’s been spent and what works are planned.

Look at the minutes of strata meetings which will tell you whether there are any structural problems such as concrete cancer or broken lifts. With the sinking fund, check to see how much is in it and whether it covers proposed works.

9. Who’s your target market?

Identify your potential tenants and know what they would be looking for in a rental property before you buy. If you’re looking at a property in a university town, you should be looking at a multiple occupancy homes near transport and amenities. If, on the other hand, you’re going for the family market, look for a large home, with an easy to maintain garden and spacious communal area.

10. How much work is it for you?

If investing for immediate rental returns, a potential rental property should be good to go – taking on one in need of renovation will only delay the time to get to market. However, if you want to flip properties, work out how much is required, how long it will take and how much you can take on.

At the most, allow for paint work and furnishing but steer well clear of homes in need of structural improvements if renting immediately otherwise you’re likely to lose a month’s rent before you even have tenants. Look for low maintenance gardens and easy to maintain properties.

Lastly, include the cost of someone managing the property for you, unless you plan to do it yourself.

To discuss this article or anything to do with your finances, please call our office today and we will be happy to assist you.

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