Determining whether a property will make a good investment is undoubtedly complicated. However, experts say it rests on 3 simple things: rental yield, capital growth potential and underlying demand.

Get these 3 things right and property investment success awaits! In this article, we help you take the next step toward property investment success. Sydney-based property flipper-turned buyers’ agent, Michelle May, and managing directors of Biggin & Scott Knox based in the eastern suburbs of Melbourne, Danelle Hunter, explain how to assess whether a property is a great investment.

 

What is the rental yield?

Rental yield is a key metric for any property investor and is often referenced by agents and vendors. Naturally, the higher the yield, the better.

A property’s gross rental yield is calculated by taking the annual rental income, dividing it by the property value, and then multiplying it by 100. For example, a property which earns $375 a week in rent, for a total of $19,500 a year, on a property purchased for $450,000, returns 4.3% gross rental yield.

Net yield figures are calculated by taking all expenses associated with the rental property into account.

According to May and Hunter, rental yield should be evaluated carefully, but in conjunction with other factors, like capital growth potential. May says, “Ideally, you want to have a property which has a reasonable rental return, (but) with maximum capital growth potential.”

Hunter says whilst yield is one key factor it is not the only indicator of potential success. “A good rental yield is good, but you need a low-maintenance property in an area that is growing and close to everything, so (it) rents quickly,” Hunter says.

What is the capital growth potential?

Picking the right property for its future capital growth can make investors many hundreds of thousands of dollars more over the years. May explains that smart investors strike a balance between high yields and capital growth. She recommends looking for capital growth performance above the median price growth.

 

Is there underlying demand?

You shouldn’t rely on figures alone when evaluating a property. The attractiveness and appeal of the property itself, as well as appeal to the market, are all essential too!

May says that a quality property will always be attractive to buyers and tenants regardless of what the market is doing.

“Stay as close to the CBD as you can afford, as there will always be an underlying demand for good quality rental properties. People will pay more to live in a ‘blue chip’ lifestyle suburb. Existing public transport links, ideally several options, are paramount.”

To be a successful investor you need to think like an owner/occupier. You need to ask questions such as what is an owner looking for? Is there storage, internal light, parking, an ensuite? May says that these are the “things that attract people looking for a home to buy, so it will also attract people who are looking to rent.”

“Ultimately, no one wants to live in a dark and dingy cave, no matter how cheap the rent is. If that is the only property you can afford in your preferred suburb, you need to move to a cheaper suburb and get a better property.”

Carefully research the market and then meet it. If targeting a family market, for instance, look at school catchment areas, outdoor space and off-street parking.

Read more: Realestate.com.au