Before purchasing an investment property, it’s essential to consider certain variables that will have a big impact on your general level of success. Three of the most important are, the rental income the property can generate, ongoing costs of ownership and the risks associated with property compared to other asset classes
Let’s explore each in detail.
1. How Much Income Will the Property Generate?
When evaluating a property, start by estimating its annual rental income. This will be influenced by location, dwelling type (apartment, townhouse, house), age, and competition in the area.
For example: A 2-bedroom townhouse in Zillmere, QLD purchased for $300,000 is expected to rent for $400 per week. Annual rental income would be $400 × 52 = $20,800. Dividing this by the purchase price gives a Gross Rental Yield of 6.93%.
However, this figure doesn’t tell the full story. Vacancy rates—often overlooked—directly affect returns. With a 3% vacancy, income falls to $20,176, reducing your yield. Both gross and net calculations must always factor in potential vacancies.
2. Ongoing Costs of Ownership
Expenses fall into two categories:
- Fixed Costs: predictable and recurring, such as body corporate fees (including sinking fund contributions), council rates, water charges, and special levies for major building works.
- Variable Costs: unexpected and irregular, such as hot water system replacement, appliance repairs, or urgent plumbing issues. Investors should also budget for landlord insurance, property management fees, and advertising costs when re-letting a property.
Continuing the townhouse example: If annual expenses total $2,000 (including taxes, insurance, and maintenance), net rental income reduces from $6,000 to $4,000—equivalent to a 4% net yield. This assumes continuous tenancy, but further vacancy risk must be considered.
3. Risks of Investment Property
Real estate is cyclical, driven by supply and demand. Buying at the wrong point in the cycle can erode returns. Thorough due diligence is critical.
Key risks include:
- Poor tenants: missed rent, property damage, and tribunal disputes. These risks can be reduced through professional property management and comprehensive landlord insurance.
- Opportunity cost: investing in property means those funds can’t be used elsewhere, such as in shares or business ventures.
- Market conditions: rental demand, interest rates, and economic shifts all affect profitability.
Engaging a skilled property manager can significantly reduce risk by securing quality tenants, conducting inspections, addressing maintenance promptly, and representing you in disputes.
Additional Professional Support
To strengthen your investment decisions, consider engaging:
- Buyer’s agents: can source and negotiate suitable properties (but require careful due diligence themselves).
- Conveyancers: ensure the transaction is legally sound and manage settlement.
- Accountants (CPAs): provide guidance on tax strategies, negative gearing, depreciation, and capital gains obligations.
Final Thoughts
Property investment can deliver reliable income and long-term capital growth, but it requires careful planning, a medium-to-long-term outlook, and disciplined due diligence. By understanding rental income, factoring in all costs, and preparing for risks, you’ll be better positioned to make sound investment decisions that grow your wealth over time.