4 Important Tips for Finding the Right First Investment Property
There are few investments as versatile as property. Property grows in multiple ways: it both appreciates in value and brings in rental income. With the right investment property, it can be both a business and an asset. Here are four important tips for making sure that your first investment property is a successful one.
Work through the Numbers
Finding the right investment property begins with determining how much you can spend. There are four important numbers to consider:
- How much you earn
- What your expenses are
- How much you have as a down payment
- How much income you can make from the rental market
It’s likely that you’ll be taking out a loan for your investment property. Not only will you need a downpayment, but you’ll also need to present a certain Debt-to-Income (DTI) ratio. This part is much like purchasing your first home.
However, there’s another thing you need to consider: how much you can make in your rental market. Some rental markets will bear larger numbers than others. If you have a shortfall in your rental income, you may find yourself paying into your investment, rather than profiting from it.
Buy What You Know (and Understand that Location Is Critical)
But how do you find the right location? Often, it comes down to buying what you know: buying in markets that you’re experienced in. If you purchase an investment property halfway across the country, you won’t know whether it’s in a good neighbourhood, what the average rates are, or whether the property is nearby to the most popular amenities.
Here are a few ways you can find the right property for you:
- Familiar markets. The more you know about a market, the better. But what if you live in a market that’s really too expensive to invest in? Your real estate agent can help you by giving you key insights into the most profitable real estate markets. You can also do research. Perhaps you can visit the neighbourhood, look at local listings, or follow up on local news.
- Growth suburbs. Areas that are growing quickly are often the areas that will be most successful. Property values are expensive but are likely to rise. Often, investors will look for properties that are at the edges of a quickly expanding city.
- Rental yield. What percentage of the property’s expenses will you be able to reclaim in rent? If a property costs you $20,000 a year to maintain and rents for $40,000 a year, then it is yielding 200%. Another way of looking at this is the percentage of value of the property that can be reclaimed through rent. For instance, a $100,000 property that rents for $500 a month has a value of 6% a year.
- Low vacancy rates. Low vacancy rates mean that the market is booming. You want to look for areas that have low numbers of owner occupants as well; look for tenant-friendly areas, specifically.
Remember: even an affordable rental in a great market is going to do well, but a luxury rental in a bad market isn’t likely to be successful. You need to consider all available factors to determine whether an investment is truly viable.
Know What to Look For
Apart from the location, you also need to consider the property itself. Some properties are inherently more desirable than others. In hotter rental markets, you may be competing with a substantial number of other units; every little advantage will matter.
A few things to look for include:
- Attractive features. There are two types of features: neighbourhood features and property features. Neighbourhood features include low crime rates, being close to a transportation line, and being nearby to grocery stores. Property features include things like hardwood floors and granite countertops. Both can draw in tenants.
- Wide appeal. Most rentals should be fairly generic as you’re trying to appeal to the broadest audience possible. Look for properties that have open floor plans and can be easily customised to anything a tenant might want.
- Low maintenance. Your tenants aren’t going to maintain a property as well as an owner-occupant would, that’s simply a given; they really don’t have a reason to. Look for properties that don’t have complex landscaping, water features, pools, and other high-maintenance additions.
- Property type. Are you looking for single-family homes or townhomes? Urban condos or suburban houses? Your property type will determine the type of tenant you’re looking for, as well as how much you’re going to spend.
It can help to look at other rentals within the area to determine what the current market is interested in. Trends change from decade to decade — sometimes even year to year in the hottest, fastest-growing markets.
Decide with Your Future Tenant in Mind
What kind of tenant are you interested in? Students want different things than large families.
Determine what type of tenant you might want, and think about what could appeal to them.
Ask yourself the following questions:
- What size of property would your future tenant want?
- What type of amenities would your future tenant want?
- What would they need to be close to?
- Are they likely to have pets or children?
From there, you’ll be able to narrow down your list to the properties that are truly likely to be profitable. You can also compare the properties you’re interested in with the properties that your tenant would likely be looking at locally.
Conclusion: Grow Your Wealth through Property
Your first investment property is only the beginning.
Once your first investment property is successful, you’ll be able to leverage it to purchase additional properties. Over time, you can grow an empire of small property investments, which can be used as primary income, investment capital, or even retirement. It all begins with your first.
To get started with your first investment property, contact the experts at Shore Financial.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.