What Makes A GREAT Investment Property?

AucklandWhy do some property investors seem to be able to continually add to their property portfolio, whereas most buy a few properties and then can’t go any further? One of the main things that separates the really successful investors from the average investors is the properties they choose to buy.

Let’s have a look, then, at what makes a great residential investment property.

Firstly, what are the main objectives of property investors? The most common objective is something like this:

“To create a passive income stream to enable me to stop working if I wanted to… to enable me to retire comfortably so I can spend my time doing what I want.”

An ancillary to this primary objective would be to accomplish this without demanding massive risk or huge effort / stress in managing the properties.

Assuming that these are the objectives, then the following are qualities to look for in a superior investment property:

1. High income

  • If your property covers all costs of ownership (the main ones being mortgage interest, rates, insurance and maintenance), it is not going to place great financial strain on your existing cashflow.
  • If you want to grow a substantial portfolio, you can not have properties that place a strain on your cashflow, because that limits how many you can own.
  • Over time, when rents increase, a property that covers its costs today, will produce a positive cashflow in the future, hence helping to grow your passive income stream.

2. High Tenant Demand Location:

  • If the rent looks high compared to the price of the property, but it is located in an area that is unappealing to tenants, you will have periods of vacancy, which equates to periods of sleepless nights, which equates to “I’ve had enough of this property investment game – I’m out!!”…
  • These frustrations are not what you need if you want to be successful!! If the property is in an area that is always appealing to tenants, you will easily be able to replace tenants when they leave… this amounts to sleeping at night, which we like!!

3. Fee Simple Title:

  • A fee simple title is the best legal tenure you can get. With this type of property, you are in control of your asset. For example, you can improve it, extend it or alter it, as you please, without consulting with neighbours, Body Corporates (as with apartments) or common leaseholders (as with cross-lease titles), subject to conforming with the local council rules, of course.
  • This is important because people (including us Kiwis) LOVE control. The more control and flexibility you have, the more control you have over your future and your choices, the more appealing the property is to LOTS of people.
  • Therefore it will be easier to sell, and more likely to sell at a premium price, when it comes time to sell (including if you need to sell in a hurry, heaven forbid!). And there almost ALWAYS comes a time when you will want to sell.

4. Traditional Construction:

  • People do not like things they do not understand. Investors especially like the tried and tested… they don’t want to experiment.
  • Therefore, to make sure your property will appeal to the broadest range of potential tenants and purchasers in the future, make sure it is built in the traditional way… weatherboards, iron or tiled rooves, bricks… this is what us kiwis feel confortable with.
  • If it has a 1990s-style monolithic style cladding system, many people will simply not consider it… don’t give yourself this disadvantage when it comes time to sell!!

5. Difficult to Replace / In Short Supply:

  • If you are going to own an asset for a long time, you might as well own one that is most likely to increase in value faster than most… and this comes down to good old supply and demand.
  • In a decent sized city, with an increasing population, demand for housing is increasing over the medium to long term. But it is much easier to increase the supply of some kinds of housing, than others, in order to meet this increasing demand.
  • For example, in central or city fringe locations, the supply of apartments and townhouses is likely to increase dramatically in order to satisfy the demand for additional housing in these locations. This eases pressure on price increases (supply increasing to meet demand).
  • On the other hand, the supply of free-standing houses in these locations, is really not increasing by much – IF AT ALL!! When you have demand increasing, and supply largely static, this tends to produce strong increases in prices.
  • Therefore I recommend buying free-standing houses, rather than apartments or townhouses.

IN SUMMARY

If you can buy a free-standing property, with a fee simple title, in a high demand location, built using time-tested construction methods, with a strong cashflow (say 7.5-8.0% gross yield or even more if possible), then you are in PROPERTY INVESTMENT HEAVEN!!

Now don’t get me wrong – I never said it was EASY to find these types of properties… and you may have to compromise one or more of these criteria, but if it was easy, EVERYONE WOULD BE RICH!!! And last time I checked, not everyone is rich…

So now for my shameless plug for a GREAT investment property that I happen to be selling!!!

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