Investment property is considered to be the safest option as it involves acquiring a tangible asset with a lot of money control and low risk. Here are 5 things that you should be considering while buying your next investment property
1. Return on Investment (ROI)
Whether you are buying a residential or commercial property, always stick to the basics and ask this question – How much income this property is going to generate?
Once you answer this question, your decision would be easier. There’s a simple formula to calculate the %ROI. Let’s say, you buy a property for $500,000 and rent it for $1800 per month. This means that your annual income from the property would be $21,600 which is 4.32%. Simply put, this is rate at which your property is going to grow. This brings us to the point number 2.
2. Better Suburb Does Not Always Mean Better ROI
By now, you know how to calculate the growth rate. You will realise that the rent disparity between a good and medium suburb isn’t much.
Let’s take an example of Tom and Joe. Tom buys a property in a posh suburb for $900,000 and rents it out for $2400 per month.
Joe buy a similar property in a distant or not so good suburb for $500,000 and rents it out for $1900 per month.
If we compare the growth rate of both properties, Tom has a growth rate of 3.2% compared to 4.56% that Joe gets on a similar property and lesser purchase price.
So if you are considering buying investment property, you are better off buying multiple properties in cheaper suburbs rather than buying one costly property in a class A suburb.
3. Do The Math Carefully
Having explained the growth rate, it is important to understand other costs associated with your investment property. The net growth rate is different to the one we calculated above as it does not account for costs in buying and maintaining the property.
Make sure the property you buy is in a good shape as there’s a substantial cost involved in repairing and renovating. Always get a building and pest inspection done, otherwise you will end up losing money on the property