How to Select an Investment Property in Australia

Question 1: How much rent could the property earn?

Try and establish how much the property could earn as a rental in today's market. You could work this out by any number of ways, including asking local property managers for their opinions. Another way to establish how much the property could earn is to check out rental listings on the major real estate websites, or asking the vendor what the current tenants are paying if the property is already rented. Remember to be conservative in your estimate - the rental market changes frequently and it's better to not overestimate the rent potential when working out whether this property is a good investment decision.

Question 2: Is the property rented now, and if so - for how much, and how long?

If the property is currently rented, ask the real estate agent exactly what the tenant is currently paying, and when this was last reviewed. It is common for landlords not to increase the tenant's rents in line with the current market, so don't be shocked if the tenant is paying an amount you consider cheap.

Question 3: What is the demand like for rental properties in the area?

Ideally, you will want your rental property to be earning income all the time, and not be vacant for long periods of time. You can assess the strength of the rental market in the area by doing things like seeing how many properties are listed as being for rent in the area on the major real estate websites, attending open houses for local rental properties and seeing how many people show up, and asking local agents how long properties on their books are vacant in the area.

Question 4: What will the gap be between your mortgage and other expenses and the rent you could receive?

Once you have estimated the rent, and the costs of the property, compare the two and see what the difference is. Depending on your tax strategy you may be looking to have a negatively geared property (eg where expenses are greater than income) - but be careful of the affect of this on your cashflow each month. How are you going to fund the shortfall if there is one?

Question 5: What types of renters would pay that amount of rent, and what would they look for in a place?

If the property is an apartment located near a city centre, your target market of renters may be young professionals. Perhaps it's near a university, and so your target will be students, or it's a large house in a suburban area where mainly families will be renting. In each case, ask yourself how much would these people pay to rent in the area, and what would they be looking for? Assess your proposed purchase by reference to what your target rental market in the area would be wanting in a rental.

Question 6: What ongoing fees will you have during the year on this property?

For properties in a strata, it is crucial for you to understand what the strata levies are currently set at. Buildings with pools, concierge services and lifts can force strata levies up towards $2000+ per quarter, whereas smaller blocks without these amenities can have strata fees of less than $500 per quarter. Again, consider your target rental market when assessing these levies. You might also want to consider your cashflow during the year - can you afford to make these large payments when they are due? Is the rent enough to cover these payments and the mortgage? Other fees to consider include the council rates, water and electricity (some of these costs you may pass onto your tenants).

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