There are so many different types of properties and there are so many different areas to invest in. There is also so much information that you can look at to work out where you want to invest. So how do you know if a property is a good investment or not?
There are many things that you can do in order to ensure that the investment you buy is going to be a good investment and that it is not going to be one of those that just doesn’t go up in value, doesn’t change, and just loses you money. That’s what we don’t want.
So how do we ensure that the property we buy is going to be a good investment? Now I can’t give you all the answers and I can’t give you some financial advice.
Well my tips are:
- Know your success criteria first
So many people go into property investing without actually knowing what the outcome should be.
For me, financial success in property investments is about getting more out than I put in. I calculate on getting at least 1% of the buying price in yearly rental income. That way I know that I have a positive cashflow. My criteria of success are probably going to be different to yours but that’s not important…the important thing is to get down on paper what exactly is your success criteria is on a given property.
Whatever it might be, set your financial goals first, because then you can assess property investments based on your financial goals and if a property is not going to move you towards your financial goals then you can avoid it. Or you’re comparing two properties and one moves you towards your financial goals faster or with less risk, then you can assess those 2 deals so much easier.
- Analyse cash flow before capital growth expectations
Tip #2 is to analyse cash flow before capital growth expectations. What I recommend is that before you go into any property is that you analyse the potential cash flow of that property. You can invest in negatively geared property or you can invest in positively geared property. It doesn’t matter what you choose – but you need to know or at least analyse the cash flow before you purchase the property.
How much is it going to cost you or how much is it going to pay you and are you happy with that?
The reason this is so important is you can begin to look at what cash on cash returns you want, and if you’re losing money well then you need to look at the area.
How much is it going to grow by? is it going to offset that loss in money?
If it is actually going to make you money well then you can look at how much is this property is paying you, do you even need the property to grow in order to achieve the financial goals that you want for this particular property?
- Look at key indicators in the area
You want to look at things like population or tourism growth or decline. You want to look at the economy and whether the economy is growing because good economies mean people are going to move into the area. If there are jobs, then people will move to fill those jobs.
You might also want to look at the type of housing. What type of places people want to live in, is it apartments, detached or semi-detached and is it two bedrooms, 3 bedrooms, 4 bedrooms, etc.
- Make sure you don’t pay too much for that property
Tip #4 to know if a property is a good investment or not is to make sure you don’t pay too much for that property. This is one of the biggest mistakes that new investors make.
They jumped into the market, but they actually purchase something for more than it’s actually worth. This means that you’ve got years just for the market to catch up to the price that you paid for that property.
So how do you ensure that you don’t pay too much? Well there’s a bunch of different ways. You can check out the previous sale price of that property in particular and compare its current price to the growth in the area. You can check out comparable sales in the area. You can even pay to get a third-party valuation done on the property; it will probably cost you anywhere from 200 to 500 euro.
You can look at growth trends in the area, you can look at the days on market which I find especially important. If properties in an area don’t really sell until after they have been on the market for 6 months, then you don’t have to jump in and make your best offer straightaway. You know the chances of that property being snapped up quickly are quite slim.
But if you are in a fast-moving market where properties are sold in a matter of days well then you do need to be on your feet and have more research under your belt. Knowing these things and knowing other things can really help you to ensure that you don’t pay too much for a property.
- Actually make it a good investment
Tip #5 is to make it a good investment. Don’t just assume that it’s either going to be good or a bad investment, because it’s not necessarily the item that you repurchased that will determine a good or bad investment, but it’s what you make of it as well.
Can you improve the property? Can you look at either development or maybe even adding a guest flat to improve the rental yield of the property? Can you manage it well by getting the right tenants and by doing the right increases in rent? Or by decking out your house in such a way that you can command the best rental yield possible?
Look at ways to maximise your income and to maximise the value for your property. With some properties this is very hard to do. I’ve got clients who have bought new built properties and it’s actually quite difficult to add a lot of value to a new built property that’s just been built because that’s the thing, it’s just been built.
So maybe look for properties where you can add that value or if you already own one, look for ways that you can improve it and create a better investment than what you currently have. That’s what I love about property, is that you can actually make your investment better.
If I go out and I invest in the stock market, there’s not a whole lot I can do to make that stock go up. On a property, you can take actions to make it a good investment.
So do your research, don’t pay too much, and try and find ways to improve your property.
By Christian Boesen
Owner at homes-abroad.com