Will buying a smaller investment property provide a good ROI?
A small property could potentially make a great investment, provided you choose the right one. The key to success with any investment property is thorough research. In this article, we take a look at how to research and choose the right small space property to give you the investment returns you’re looking for.
Pros – why choose a small space apartment or unit?
There are lots of benefits to buying a smaller property such as an apartment or a unit. Houses often have a higher entry price point due to land value, so you could potentially buy an apartment or unit with a smaller deposit. Ongoing costs for apartments and units can be a lot less too – council rates are usually higher on a house and in many states, you’re also required to pay land tax on an ongoing basis. With a unit or apartment, costs are limited to strata and body corporate fees.
Maintenance is also a cost that must be taken into consideration. If you purchase a house, all maintenance issues are your responsibility, whereas with an apartment or unit, many of these costs are covered by the body corporate.
These factors mean that a unit or apartment may be more favourable from a cash flow perspective – which is great, particularly for first time investors. Additionally, if you do your research carefully, you could potentially locate an apartment or unit in a location set to make both great capital gains and solid rental returns.
Cons – how small is too small?
Some developments offer studio and one-bedroom apartments of less than 50sqm. Many lenders are reluctant to finance these properties, and also some small space properties in high rise, high density developments, so it pays to discuss any property you may be considering with your mortgage broker before you sign a contract or put down your deposit.
Research is the key to success.
So how do you know for sure that a location will be in high demand for small space renters in the long term? Small space apartments and units are often in high demand in locations that are close to the action for singles! These may include the city centre and other busy employment hubs, universities, areas with vibrant nightlife, or excellent public transport facilities that provide fast and easy access to these amenities.
To find out what you need to know about a particular location, start by talking with local real estate agents and property managers. Essentially, you’ll want to find the answers to these questions about your chosen location:
- How is the local economy doing? Is there employment growth?
- What is happening that will affect supply and demand of small space property in the area in future? Are there many new developments in the pipeline?
- What is the historical growth of property prices in the area?
- What are the current rental yields on properties similar to the one you are considering?
- What is the median price of properties in the area?
Your mortgage broker can also provide you with a comprehensive report on any location or suburb of interest. They have access to specialised data from Australia’s leading property market data supplier, CoreLogic that specifically targets small space apartments and units.
How to analyse the market data.
You’ll want to analyse the data you collect to find a location with positive capital growth and solid rental yields to maximise the profit potential of your investment. (If you need help, please ask us as we have a great deal of experience!) Some other good indicators of these include:
- Days on the market. How quickly do properties sell in the area?
- Vacancy rate/demand to supply ratio. Is there much competition amongst renters?
- Rental yield. What percentage of the price of the property can you collect in rent?
- Auction clearance rates. Do sellers need to reduce the price to get a sale?
- Limited available property. This could suggest that demand exceeds supply and this is likely to drive future capital growth.
Ask your mortgage broker to help you crunch the numbers!
There are always reasons for and against investing in any type of investment property. The right investment choice for you will depend on your financial position and investment strategy. If you’re considering investing in property for the first time, a small unit or apartment could be a good way to start, so ask your mortgage broker to help you crunch the numbers to see if they add up!
Remember, a good mortgage broker can be an invaluable resource when investing in property. They’ll help you choose the right loan that will not only serve your needs now, but set you up for further investments in the future. Talk with your mortgage broker today – they’d love to help you get started with a little property investment!
The information provided is general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. This article does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.