- Posted 02 Sep
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A successful property investor understands the importance of accurate research and effective planning. In the past it may have been difficult, but today’s investor has so much information available online that the key becomes knowing where to look and what to tune out.
Here are some tips for doing effective research and avoiding the mistakes that can come from not having the right information.
Don’t cut corners
In hot property markets like Melbourne you may feel the pressure to act fast or lose out to other buyers who are willing to snatch up any available property. But doing too little research can have serious consequences for investors.
If you truly want to find a good property with a lot of potential, you need to know all the facts. Check similar nearby listings to help you avoid overpaying for a property. Look at rental statistics for the neighbourhood to determine how much you’ll be able to get on a monthly basis, typical turnover rates, and average time to rent.
Consider the type of loan you’ll be able to get for the property. Will you be able to borrow against the home in the future if you need to? It is in an area where a quick sale will be possible if you need to liquidate? Your goal is both to avoid a property that under performs and avoid having your money tied up irrevocably in case your needs change.
But don’t research too much
The other extreme is also true – you don’t want to get stuck in never ending research to the point where you are afraid to take action. Too much information can confuse you and may mean you miss out on opportunities to people who are more willing to take a risk. This is typically a problem for inexperienced investors who are afraid to trust their instincts and get stuck in a loop where they fear making the wrong decision so they continue to do more and more research.
A due diligence checklist can keep you from under- or over-researching. Consider the types of information you want to know, what you’ll you need for your broker and accountant, and any other relevant data on the neighbourhood, local markets, etc. that will help you make a good decision. Once you codify this into a checklist you’ll make sure you don’t miss any details.
You also want to make sure you focus on the right indicators. Many investors look at population growth in an area as a signal for rising home values, but this isn’t the only aspect you want to examine. You should also check out the supply of existing homes on the market and any future developer plans on the book. If developers are planning a huge building spree this could cause older homes to become undervalued.
Another important number for investors is gross rental yield or the ratio of rent income to purchase price. Obviously you want to invest in an area with strong yields, but keep in mind that falling property values can also boost gross rental yields. So you need to look not just at a high yield price, but also the mathematics behind that rate.
Diligent research can go a long way to helping you make smart property investing decisions. If you are a novice investor, look at what others are doing and find a mentor whose experience can guide you.
Australian Credit and Finance helps people get home loans every day. Contact us with your property investment questions and let us help you find the right product to suit your needs.