investing in property: what do we do?

I thought if you’re reading this blog, you may possibly be interested on what we consider when buying investment properties.  Of course, you may find it all hideously boring.  I hope not, though!

In no particular order:

1.  Small units.  We actively seek out either one or two-bedroom units, preferably with a bathroom/laundry.  This is for a number of reasons.  Firstly, a lot of major issues such as plumbing, roof maintenance, and gardens, are not the problem of the individual owners, but are dealt with by the council of owners, who are elected once a year.  This removes a lot of things that can go wrong from our area of responsibility.

Secondly, I worked out that the highest return for the least amount of monetary output occurs in smaller homes.  What this means is that we can buy a one-bedroom unit instead of a two-bedroom unit and save $50,000.  In turn, the weekly rent isn’t that much less, it may be $40/week less.  This increases as the number of bedrooms increases, but not linearly.  What this all means is that we get better returns on owning two one-bedroom units rather than one three-bedroom unit.  Also, the Australian population is trending towards more single-person households, so we’re anticipating a real need by buying smaller homes to rent.

2.  Location.  This is an oldie but a goodie.  We look for properties that are undervalued for their location.  For example, both Osborne Park and Glendalough in Western Australia are close to Perth, public transport, shops, and other facilities that people value.  They are also surrounded by suburbs which are relatively much more expensive.  As property prices continue to increase over time, the handy location of these suburbs will see home values increase.  At the moment however, they are fantastic value considering how close they are to different amenities, and their proximity to more expensive suburbs.

3.  Scope of works required.  We are careful to only buy properties where we can do the majority of the upgrading ourselves.  SO is particularly handy, which is great (my father was an accountant, but not good at anything requiring power tools, so I still get a kick out of SO being good with them!), and I’m okay with grunt work stuff (scraping, patching, painting, tiling, and buying furnishings and furniture).  Any property requiring moving of walls, major plumbing works, electrical rewiring etc is passed over.  We know our limits.  We’re also savvy enough to recognise if there are major structural concerns, which eliminates the property from our list of contenders.

As part of this, we consider what alterations can be made which will improve the ‘rentability’ of the property, at minimal cost and effort to ourselves.  For example, in our current renovation project, we’re getting a front-loader washing machine installed in the kitchen.  Obviously it’s not an ideal location, but as the unit is on the second floor of a block of flats, which only has stairs and a (revolting) communal laundry, it will mean we can charge up to an additional $40/week rent for the convenience of washing your knickers in the privacy of your own home.

4.  Consider what else is happening.  This is one point that can be hard to do.  I’m an economist, so I tend to look broadly at what is happening in the area we’re looking at buying in (in our case, Western Australia).  However, there are also specific issues that should be considered.  Some of the things I think about are:

• what is happening with interest rates? (can we afford an increase/s? Will mortgage defaults increase due to these pressures, requiring more people to rent?)
• what is happening with the rental market? (eg. WA is undergoing a boom driven by the mining/resources sector, resulting in an influx of people who are looking to live in Perth for the short to medium term.  These people are more likely to need rental accommodation, than buy property here.)
• why would someone rent this property from us? (is it close to work, in a good location, close to public transport and shops, a ground floor unit)

5.  Tax issues and implications.  I’m not an accountant, so please don’t regard this as informed advice.  However, before buying a property, we carefully look at the specific implications for us, and what we have to do to maximise our return (or minimise our loss, whichever applies).  For example, we always get a tax depreciation schedule done by a recognised organisation specialising in such schedules.  This provides a basis for claiming depreciation of capital over time, and can result in a handy bonus at tax-time.

6.  Furnished vs. unfurnished.  We choose to rent our properties furnished.  While it does attract a more transient tenant, we find it’s worth the extra hassle.  We can also get a really good return from our depreciation schedule, as furniture and furnishings are included on it.  There are absolutely fantastic items for sale second-hand, which look like new.  For example, we bought a second-hand LG fridge/freezer which was the current model, and had only been used to store a small carton of milk, for $160.  It was in perfect condition.  Our depreciation schedule lists its value as $800.  This contributes significantly to our tax return at the end of the year.

7.  Don’t overdo it.  With our first renovation, we spent three weeks working weekends and nights after work to get it up to scratch for renting.  I would not recommend this course of action to anybody!  We were both exhausted, physically, mentally and emotionally.  After that experience, we’re careful to take annual leave (or other leave) to concentrate on the reno.  We try to stick to working Monday to Friday, 9am-5pm, leaving our nights and weekends free.  Sure, sometimes we go a bit later at night, or do a half day on the weekend, but only if really necessary.

8.  Budget cautiously.  This goes for everything, from the actual renovation budget, to the expected rental return and vacancy rate.  I personally budget for 6 weeks’ vacancy per property per year.  In other words, I’ve allowed for each of our properties to be vacant for 6 weeks each year, through making a slightly higher mortgage repayment every fortnight.  I also under-budget with respect to expected rental return.  On one of our units, I budgeted in the first year for a return of $180/week.  We actually got $220/week, and it’s just increased to $240/week.  For the next budget, I’ll put in a rental return of $220/week, rather than the $240 we’re now receiving.  This extra ‘fat’ in your budget can make an enormous difference if something goes wrong.

9.  What if….. something goes wrong? This can range from a water heater blowing up to more serious possibilities.  You need a plan just in case the you-know-what hits the fan.  What would you do if someone falls pregnant, loses their job, writes off their car, becomes very ill, etc.  It doesn’t really matter what you do, as long as you have a fallback position in the event that something disastrous occurs.