What Makes a High-Performing Property?
Real estate is a very effective way to build long-term wealth and passive income — though it's not that simple. That's because not all properties are created equal. But capital growth and rental return are indispensable factors when looking for a high-performing property.
This is why you have to look for the right kind of property.
For capital growth, you want to find properties in areas that have high growth potential.
When it comes to rental returns, you want to ensure that the money you make from renting out the property covers all the costs and gives you some extra cash. In this post, I’ll go through what makes a high-performing investment property for growth and rental return.
1. Location, Location, Location
Location is really important when it comes to buying an investment property. That's regardless of whether you’re looking for short or long-term growth. So, when looking for an investment property try to find a desirable suburb that is attractive to owner-occupiers and tenants.
Think about the kind of people who want to live and move into a particular suburb.
Are there any upcoming changes or developments that could attract more people?
Will the suburb attract higher-income households who can afford to pay more for properties in the future? Or will it continue to attract lower-income households who cannot afford to pay more - and keep property prices low?
Is the suburb likely to attract more owner-occupiers who are willing to pay more for their dream home and do some renovations? Or will it only attract renters who will come and go?
Is the suburb “up and coming” or going through gentrification? e.g. lower socio-economic groups moving out, and higher-income families moving in.
Long-term growth is usually more stable in suburbs that are always in high demand. That's because of lifestyle factors like being close to CBDs, parks, and beaches. Consider Sydney's Inner West, North Shore, and Eastern Suburbs as prime examples.
Suppose a property is not in perfect condition. It may still have a high chance of experiencing strong growth in the short and long term. That's if it's located in a desirable neighborhood that continuously attracts more people wanting to live there.
2. Potential To Add Value
Sometimes, when searching for an investment property, you may get a house that needs a little work — like if it's got an old-looking carpet or needs a new paint job. That should not worry you! That's because you can fix it up, and it'll be worth more immediately and in the long run.
Let's say you spend $5,000 to put in new timber floorboards and $6,000 to paint the inside; that's like $11,000 total. But then, if you get the house re-valued, it might be worth $20,000 more!
Just keep in mind that this only works if you're buying the house for less than its market value (and don't overpay.) Plus, if you fix it up nicely, you're more likely to attract better tenants and you can charge more rent.
Note: Spend your money wisely on renovations. Focus on things like paint and carpet that don't cost much but will add value to the property.
In some cases, you could add a lot of value through development projects (subject to council approval). This can be done by building a granny flat and renting it out to another tenant to create another income stream. OR doing a subdivision project by adding another home to the block or knocking it down to build a duplex.
3. Tenant Appeal
Of course, the demographics of a suburb can really affect how well a property performs in the market. So, if you want to find good tenants and keep the place from being empty, consider who lives in the area and if your property meets their needs.
For instance, if you’re buying in a suburb that has a lot of young families, it’s probably better to go for a 3 or 4-bedroom house with a backyard, and located close to a school or in a good catchment area.
If you’re buying in a suburb that has a lot of young professionals or couples without children, a backyard becomes less important.
By making sure your property fits the people who live in the area, your property is likely to always be in demand whenever you’re looking for a tenant - and less likely to be empty and sitting there for months without generating any income.
Also, you should consider if the property is in a state that would attract a quality tenant who is willing to pay more rent and look after it — or a low-quality tenant who won't care about your property.
Other Factors
Other factors to consider when evaluating a high-performing property are the condition of the property and its cash flow.
You want to ensure your property is in good shape so you don't have to worry about repairs or other problems that could hurt your profits (e.g. leaking roof, plumbing, mould, etc.)
And then there's cash flow. That's when a property brings in enough money to cover expenses and interest payments. There are so many properties that meet all of the criteria mentioned above but cannot generate enough cash flow for their owner to hold onto it without having to dip into their own pockets to keep up with mortgage and interest repayments.
I’m a firm believer that a high-performing property needs to have neutral or positive cash flow. That way, the property can cover its own expenses and generate an income.