The process for assessing an investment property is not the same as the process for choosing your home. Instead of making decisions based on how you feel about a property, it’s wise to assess an investment property on metrics and data. After all, an investment property is exactly that: an investment. It must provide you with some type of financial benefit, usually in the form of capital growth and/or cashflow.
Investors use metrics to assess the suitability of investment properties. Here are five of the most commonly used…
Metric 1: Median house price
‘Median house price’ is a commonly misunderstood metric. Many people think this is the average (or mean) house price, but it’s not. realestate.com.au defines the median house price as:
‘the midway point of all the houses/units sold at market price (or sold amount) over a set period (monthly, yearly, quarterly, etc.). That is, if there were 101 houses sold during the month, the median house price would be the house price in the middle i.e., that has 50 house prices above it and 50 house prices below it.’
By looking at the median house prices over time, you can gauge what types of properties are doing well and in which areas.
If you have an area (or property) in mind, reach out to us and we’ll help you locate its surrounding median metrics.
Metric 2: Vacancy Rates
Vacancy rate is what it sounds like. Usually presented as a percentage, it’s the number of vacant or empty rental properties in an area. This metric is useful to prospective property investors because they can see at a glance how likely a property is to be tenanted.
A ‘healthy’ vacancy rate is around 3 percent.
High vacancy rates show an investor’s property has some competition so may not rent out quickly.
However, lower vacancy rates, often referred to as ‘tight rental markets’, mean properties are likely to be snapped up quickly. It also means there’s more room to increase the rent and landlords can afford to be ultra-selective with their tenants.
Metric 3: Days on market
Days on market, or DOM, is a statistic tracked by most real estate agents and is the number of days a property is listed for sale.
In a hot market, with a lower DOM, properties are sometimes sold before being listed. The seller gets the price they want and the buyer doesn’t have to waste time negotiating. Done deal, in and out, super-fast and everyone’s happy.
In a slower market, with properties languishing on property for sale lists for longer periods of time, the opposite is true. It’s a buyer’s market with someone eager to sell being left with no option than to reduce the asking price. Now, this isn’t a bad thing for investors looking to buy, but once house prices in an area start to fall, you might want to refer back to median house price.
Metric 4: Loan-to-Value Ratio (LVR)
If you’re looking to borrow and use your new investment property as security, you’ll need to understand your Loan-to-Value Ratio (LVR). Your LVR is a percentage of the amount you’re borrowing against the value of the property. A lower LVR means a lower risk to your lender (and lenders like low-risk borrowers).
Most lenders won’t allow you to borrow more than 80 percent of your LVR without expecting you to pay Lender’s Mortgage Insurance (LMI). Speak with us for more details about this.
Metric 5: Rental Yields
You’ve bought an investment property to make money, so your ‘rental yield’ should be a big consideration for you as an investor.
Rental yield is how much money you expect your property to generate as a percentage of the purchase price. In other words, rental yield is how much rent you make as a percentage of how much the property is worth.
But be careful, as there are two types of rental yield – gross and net.
If somebody is telling you expected rental yields on a potential new investment property, make sure to check if they’re giving you gross or net amounts.
(Just a tip, it’s the net amount that’s the really important one as that’s the ‘dollars in your pocket’ number.)
Can We Help With Your Property Journey?
Of course, you don’t need to research these metrics when you’re planning your property investment journey–that’s what we’re here for. If you’re looking for an expert team to help with your property investment journey, request a Free 30-Minute Finance Strategy Session during which you will…
- Gain greater clarity over where you want to be in terms of owning investment properties (and how to structure your loans to get there the fastest, safest way)
- Discover how to unlock the equity in your current properties, so you can build your portfolio – and your wealth – faster (and enjoy a better lifestyle now and in retirement)
- Discover clever, no-cost ways to save money on interest, fees, and charges — immediately
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans for cashflow positive investors
- Learn about our process to find you a better loan that will save you thousands.
This no-obligation session will be held with one of our experienced mortgage brokers.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Schedule Your FREE 30-Minute Finance Strategy Session Today
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).