5 things you need to know before investing in property
Investing in property is one of the best strategies for building wealth. While there is no definitive right and wrong approach, there are a few things you should consider before investing in a property to minimise risk and maximise your returns.
Infrastructure
Infrastructure such as roads, bridges, telecommunications, transport access, and amenities can impact on the value of a potential investment. A location with sound infrastructure is likely to offer more predictable and higher investment performance. You should also consider future, potential developments in the area and what this could mean for your investment.
Population & Demographics
Generally, the more densely populated an area, the more demand there is for housing, and the higher the price. The demographic structure looks at the type of population, such as singles, couples, families, first home buyers, or the retired and elderly. Trends start to develop and this can affect who invests in an area and the demand for housing.
How are children, young families, or over 65’s represented? This can tell you a lot about an area and its potential for future growth or rental return. Areas with strong demand by young families may indicate an area which is gentrifying. Or if the area is strongly represented by seniors still living in their homes from 40 years ago, this may indicate an area on the cusp of growth.
Economics
What is going on in the market? Consider auction clearance rates and average sale prices in the area you are looking to invest. It is also important to look at the economy more broadly. What is the level of unemployment in the area you are looking to invest and across the board? What are interest rates like and how are they likely to change in the next 5 years? These economic factors will not only impact on how much you’ll need to pay but also on potential growth and rental yield.
Supply & Demand
When considering locations to invest, look at the overall supply and demand of the area. When there is more demand for housing than there is housing available, the price of purchasing in that area may be higher, but it also means the potential rent you can charge will be higher. It may also indicate capital growth potential.
Yield and price point
Before buying, it’s a good idea to work out the yield on the property. Yield is the income on an investment, and is usually calculated annually as a percentage based on the property’s cost or market value. A lot of investments are sold based on their potential yield, and future increases. You also need to work out your price point – this is the maximum amount that you are willing and able to pay for the property.
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