Calculations to do before deciding on an investment property

Apologies in advance because I'm sure someone has had this question before on this forum but unfortunately had trouble locating what I was after. Happy for people to link me to any relevant past threads.

I have been looking into some properties within the Werribee, Hoppers Crossing and Wyndham Vale area and am looking into calculating some figures to see what offer price makes it a suitable investment. Just wondering what else I could be looking into apart from below?
- rental yield (approx 3.5%)
- weekly rent (approx 350 per week)
- annual capital growth (5.3%)
- previous sold prices
- Lend Power Cashflow Calculator Template by David Shih

 

If the vendor doesn't accept the price at which you think it's a 'suitable investment', what do you do?

 

Apologies Trainee, I'm not too sure I understand what you mean here. If I'm interpreting your question correctly, my answer is that I would walk away if I do not believe the vendor's asking price makes the property a worthy investment.

 

Good answer!

 

While strict criteria and the willingness to walk away are good, if the criteria are so onerous that you can never buy anything.....

 

These are all metrics which help you understand the cash flow and ownership parameters of the property.

But these metrics are going to change from one location to another. Some locations will have better or worse metrics than outlined here. There may be trade offs between one and another.

These are just numbers. Largely irrelevant really. Here's the one that actually means something by which you can determine the actual market value of the property...

The really important thing you should understand is how this property will make you money, how it fits into your strategy. The original metrics might help with that, but sometimes with the best opportunities they might not be relevant at all.

 

This is an interesting thread.

To tag on to what Peter T said, the metrix above area really useful, but there a no qualitative metrics in there. I would suggest adding some qualitative analysis, even if it is a list of pros and cons.

When I am buying property for clients, I look at a lot of metrics including Walkscore, previous sale price, some demographic analysis (owner occ vs investment make up of the suburb), and I do a long list of pros and cons.

I also try to estimate the potential price using multiple methodologies (comparables, rent capitalisation etc), and never just one methodology.

I have come to the thinking that you have to deal with the market you are given at any particular time. This can mean buying in an expensive market which is okay, but to Trainee's point, you need to make sure that the criterion aren't so rigid that you don't buy anything. And don't focus solely on cash flow centric criterion so that that only Broken Hill stacks up.

Buy a great property, use a mix of qualitative and quantitative factors to get comfortable with the deal, and the capital appreciation will take care of itself.

 

One thing i suggest you to do is work out the NET yield.

 

Capital growth is a guess? As they say "past performance is no indication of future gains"

 

I hope I don't offend you by saying this but the figures I had included in my initial post were based on my research of average figures in the 3 suburbs so I don't view my criteria is strict. Although this wasn't my intention of starting this thread, if you have sources that say otherwise, I would love to hear from you though

 

With regards to demographic analysis, I would assume this refers to a large investment make-up being not suitable for investment?

 

Infrastructure - existing, approved, planned. A new bypass road may improve the suburb (or kill it).

Is there something major in the wind that will drive prices? Eg school expansion, 100's of new units, draft LEP (lots of new ones happening due to council amalgamations a couple of years ago).

 

Maybe just a general observation that some rely too much on strict criteria based on this book or the other, and then end up not buying anything.
As one example, yields in Sydney generally have been falling for years. So if you relied in a historic 5% gross yield, for example, you would have missed out on a lot of capital gains, and jumped onto higher cost stuff.

 

Also be aware of some of the costs of investing which can ruin a good yield - land tax (can be major cost), insurances, property management fees, body corporate (if it’s in a complex) and others.

 

These are kind of non-emotial checklist I built myself over time to see the actual picture of the property. This list is to check the property rather than location or cashflow. These are not in any particular order but, checking using this gave me a good picture of the pros and cons to make an offer. But most the properties won't tick all the features.

• Land Size / Frontage / Easements / Sewerage
• Flat / Slope / Corner block
• Land direction
• Is Heritage listed?
• Flooding history
• Trees. Larger trees used to be a headache for a rebuild
• Granny flat/dual occupancy
• Door open close check for old houses (Simple check see structural issues on old houses. If house floor is not stable, doors won't close perfectly.)
• Traffic (Connecting road / Alternative road)
• Power line / Cell Towers / Transformers
• Utilities Gas / NBN
• Building age
• Land Value via Property address enquiry
• Brick / Cladding / Weatherboard
• Number of rooms/bathrooms
• Is livable right out or Can add value?
• Unique features - attic / inground storage / workshop / Solar / Pool

 

Thanks for the detailed list! Just a few points I didn't understand and was wondering if you might be able to advise further. Would you be open to elaborating why the below are significant/what I should be looking for here and where I can find information on these?
- easements / sewerage
- land direction
- utilities gas
- cladding / weatherboard

Regarding the property address enquiry, do you happen to know if there's a Victorian equivalent? I did check out land.vic.gov but I sadly couldn't locate a valuation like the NSW one.

 

These aren't metrics you can apply a simple forumla to. They're features of the property which may inflence on what you can do with it, or what the future demand of the property might be.

Easements & sewerage don't really make any difference unless you want to extend or modify the property. They may affect it's development potential. Land direction might give the property nicer views than other similar properties, it might also affect development potential.

There's lots of ways to be successful in property investment, but there really isn't a simple formula or manual for it. The most successful investors understand the numbers in the context of the property and location they're looking at. They'll often see potential in the property that others don't and this isn't necessarily quatifiable. You need to look at the property and understand how this will fit with your own plan and how it will make you money.

 

100% True!

 

Easements / Sewerage - Does affects re-development potential and also in some cases it's value.

When I was looking to buy an IP a few months ago, there was a nice property within the catchment area for a selective school, but there was sewerage running right across the middle of the land. It was on the market for a while and ended up selling a bit lesser price. Yes, you can do re-development with a bit of extra cost by doing a casting around the sewerage. But its always best to know what you are getting on to.

Easement restrictions the amount of land you can use when to do a re-devolpment.

The land direction is more subjective due to personal preference.

Gas - If a property does not has a gas connection, it's okay as long as street got the gas line. You can check this from the local gas distributor website using the property address.

Again, cladding, weatherboard and brick are subjective on personal preference and maintanace.

When I was looking for an IP, my aim is to know what I am getting in to based on my objective. With the current market, it's hard to find a property which ticks all the checks. Workout the important items based on your goal. I was on the market for 5months last year. Inspected about 95 properties. Only 7 or 8 fell into what I was expecting.

 

I think having a good set of matrix is good.

My experience is property investment is both an art and a science. With a bit of luck.

Who would have guessed Covid came in 2020? And trade wars, etc. So, make sure there are some contingencies built into the calculations, and hope things will be allright. Oh, factor in the tenants-from-hell and vacancies too. That can happen when you are least prepared.