The appeal of an investment property to potential tenants should be at the forefront of an investors mind, as it is the tenant who will pay the rent and, ideally, take good care of the property.
But possibly, more important is the appeal to future buyers, even if the investor has a buy-and-hold strategy. This is because demand from owner-occupiers, rather than investors or renters, is the key driver of capital growth in the long-term.
Two-thirds of Australians live in a home they own, while the remainder rent, according to Australian Bureau of Statistics (ABS) data. Owner-occupier appeal is one of the core aspects to look for in an investment property, because these buyers represent the largest segment of the market.
Residential real estate is not dominated by investors, it’s dominated by people who have a basic survival need. Seventy per cent of the market buy property for a roof over their head and 30 per cent buy it as an investment.
You really want to buy a property that suits families and couples who are on higher incomes. If a property only appeals to investors, there may be less possibility of long-term capital growth and market share of buyers.
A good strategy comes down to understanding that property is about people. Who really wants to live in your property – not rent it but buy it.
Owner-occupiers are more emotional in their property decisions than investors, who are primarily motivated by financial return.
They are more likely to pay a premium for a property that ticks all the boxes, while investors are more likely to walk away if the numbers don’t stack up.
Know your future buyer
Many investors base purchasing decisions on rental yield, as properties with high rental returns are more likely to be positively geared.
To maximise capital growth, smart investors should consider selecting properties that will appeal to affluent buyers, as owner-occupiers who earn more can borrow more.
Despite the higher price tag and lower yield, an ‘investment-grade’ property is driven by broad demand.
Smaller properties (such as studios and 1-bedroom units) appeal to singles and couples and properties in regional areas appeal mostly to local owner-occupiers and investors and, without the diverse employment options found in the capitals, affluent buyers can be limited.
On the other hand, a free-standing two or three-bedroom house 30 minutes from the CBD of a capital city would appeal to a larger number of more diverse buyers.
It is true that at the end of the day, the property you buy will be determined by your investment budget. Look for properties in the medium price range (above the medium may have yields that are too low, increasing holding costs), good locations, near transport, schools, shopping and lifestyle amenities as the increased demand and the limited supply of this property type will mean its value will increase faster than less sought-after properties.
Despite the sometimes, higher price, lower yield and a potential shortfall between rental income and expenses, an ‘investment-grade’ property is more likely to generate greater wealth for the investor through strong, long-term price growth.