Five investment properties to avoid
Despite all of its advantages, residential property investment is not a foolproof way to make money. You need to develop an understanding of the market, do your research, buy the right property and be patient while you let the capital growth take effect.

As capital growth is always the priority, the most important decision is which property to buy. Previously, I’ve discussed how to identify a good investment property. This week we look at some properties to avoid.

‘Bargain’ second-tier city locations

You sometimes see ads for apartment blocks targeted at investors. On paper, they sound great – brand new, two bedrooms, two bathrooms, balcony, security car space, inner city location, $400,000. The pricing is very keen. Sounds like a bargain but be cautious. If something looks too good to be true, it probably is.

Once you get over the lure of the low asking price, you’ll soon realise these blocks are in inferior locations that don’t appeal to owner-occupiers. There will be little growth in the long run. The reason the pricing is so keen is probably because the developer has bought the site cheaply as no one wanted it and/or they’ve been able to get away with inferior fixtures and fittings.

Rental guarantees

A rental guarantee is where a developer guarantees a purchaser a certain minimum rent for an initial period. The developer will subsidise any shortfall from the guaranteed amount. You’ll see a big headline in the ad: ‘Guaranteed seven per cent per annum for the next five years’.

Rental guarantees are often used by developers to justify inflated prices. It’s not uncommon for the rent to drop when the rental guarantee period expires, leaving you with a big hole in your budget. At that point, you have to live with the market rent and make that cash flow work.

My view is that an investment property should be able to stand on its own two feet. If someone has to guarantee the rent, then it’s probably not a sustainable, realistic rent. This means you’re probably paying a premium price based on that. I’m a great believer in just letting the market rent flow through.

Serviced apartments

Serviced apartments are a bit like hotel suites without the room service and housekeeping. They’re popular with business people and holidaymakers for short or long stays. Investing in a serviced apartment carries a lot more risk than buying a house or an ordinary apartment. You’re relying on the operator to get it right and on the tourism and business markets to remain strong. With ordinary apartments and houses, there’s always demand from people wanting to rent.

By definition, the resale market for serviced apartments is confined to investors so you’re restricted to a much smaller re-sale market. Since growth generally comes from owner-occupiers, if you buy a property that can only ever be used as an investment, it’s not going to have the same growth potential either. The market for serviced apartments is still largely untested in most parts of Australia.

Refurbished commercial property

A building that has been purpose-built for commercial or industrial use doesn’t always work well as a residential space. Compromises often have to be made with floor plans, leaving apartment owners with unworkable rooms and wasted space.

Also, the biggest problems I’ve encountered with owners’ corporations have arisen from structural defects in retrofitted commercial buildings. They all look great on day one, but after a couple of years they’re often beginning to show problems. There’s been a lot of structural cracking in the walls and ceilings and I’ve known a lot of buildings with major leaks.

Company title apartments

Company title buildings often have by-laws restricting owners’ rights to rent their apartments. They can range from a total prohibition to the prospective tenants being vetted by the owners’ committee. With so much strata title property to choose from, there’s no need to put yourself in a position where you have to jump through these hoops each time you get a new tenant.

These are the big ones to avoid. As always, I also recommend that you trust your instincts when looking for an investment property. If something doesn’t feel quite right, make some further investigations or simply walk away. A quality investment is worth waiting for.

Posted by John McGrath – Switzer News on 8th February, 2011