Puzzle Finance Blog

How to make the grade

A rental property must meet the needs of tenants and not just reflect what trends might indicate.

It's easy to let down your guard in a rising real estate market. Investors can be tempted to buy inferior properties, thinking that if they offer a B or C-grade house or unit to tenants at a slightly reduced rent everything will work out fine.

But the belief that you can generate capital growth and rising rental returns from any old property is a big mistake. An empty property is a landlord's worst nightmare. It produces no income, so you shouldn't lose sight of the fact that an A-grade investment is an appealing and easy-to-maintain property in an area where tenants want to live.

If you're looking to invest, be aware that issues such as the scarcity factor and location are more important than the initial financial outlay in the long run. What might seem a bargain one day can quickly turn into a foolishly accepted deal.

One factor that trips up some investors is that large and very different regions are often grouped together in property market research.

For example, the Real Estate Institute of Victoria has released price data showing the median house price in Melbourne rose in seasonally adjusted terms from $534,000 in the last quarter of 2012 to $561,500 in the first three months of 2013.

This amounts to a 5.1 per cent increase in prices. Prices for units snared only a 1.4 per cent seasonally adjusted increase for the March quarter to a median of $456,000.

But figures on median price growth can mislead investors. Regional or city-wide data on rental demand and vacancy rates also provides a less-than-accurate picture.

The importance of looking beyond general statistics and analysing the nitty-gritty of specific areas is highlighted by property analyst Michael Matusik.

In a recent rental market analysis (see matusikmissive.com.au), Mr Matusik says reports about low residential vacancy rates and how much rents have risen in many parts of Australia don't reveal the true state of play.

He says other measures of the rental market suggest that rental growth is slowing down.

''Also, more renters are sharing accommodation in order to afford to live in preferred locations,'' he says. ''Plus, renters are leaving sub-par, even average digs, and relocating to better properties.

''Renters are also staying longer in quality and well-maintained homes and occupying lesser-quality properties for increasingly shorter leases.''

Buyer's advocate Peter Rogozik says many high-rise apartment blocks are being built in secondary locations with ''too much of the one thing in the one spot'' and investors shouldn't compare them with smaller unit blocks in high-demand areas.

''You can't rely on statistics when talking about the apartment market because they are generally distorted,'' he says.

By analysing Australia's 1600 postcodes, Mr Matusik found 52 per cent experienced an increase in the number of dwellings available to rent in 2012. He says investors must realise that competition is fierce in rental markets, and that this makes property choice critical to investor success.

Analysts see a trend to Generation Ys delaying, or forgoing, home ownership in favour of renting apartments in medium-density developments.

The catch is that these tenants want to live close to where they work and play. If you're buying an investment property, you should be thinking inner suburbs (that is, within a 12-kilometre to two-kilometre radius of the city centre), many experts say.

''Tenants are leading the 'space for place' charge, forgoing personal space in order to afford to live near the action,'' Mr Matusik says.

He adds that prospective tenants always compare a property to whatever else is on offer and won't blindly accept the asking rent.

Posted by Chris Tolhurst - The Age on 28th April, 2013 | Comments | Trackbacks

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