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Finding an attractive investment property

Discussion in 'Real Estate' started by robt, 29th Mar, 2010.

  1. robt

    robt Curious Onlooker

    Joined:
    29th Mar, 2010
    Posts:
    4
    Location:
    Melbourne, VIC
    Hi All,

    Just found this website earlier today and I'm amazed by how much valuable information and advise that's available here!

    I've been considering buying my first investment property, but I know very little about the world of investment and I'm not sure how to tell whether a property is worth the investment or not.

    Initially I thought I could just check if the rental yield was higher than the interest rate at the bank, than it's worth it. Otherwise I may as well put the money in the bank and earn higher, low-risk cash flow.

    But after doing a bit of research, I quickly found that very few areas offer rental yield that is higher than the bank's interest rate and none of them is in or even anywhere near the 'hot' suburbs, where I imagine more investors build their portfolios in. So I have a strong feeling that my logic must be flawed.

    But otherwise how do you tell whether a property is worth the investment or not? Do you have to guess how much capital gain you'll get when you sell your property and put that into the calculation? If so, how do you estimate the capital gain?

    Thanks in advance, and please excuse my ignorance.


    Regards,
    Rob
     
  2. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Your logic is not flawed at all. It's completely logical, and that's why there is quite a big argument going on at the moment as to whether Australian housing is in a bubble and will eventually see price falls in the future.

    Like any argument there are two sides to the story, one is the marco side of the argument that factors debt levels, global credit markets, etc and the other side is about micro elements or housing shortages, tax advantages, FHOG's etc.

    Much of it is in the eye of the beholder. Some people believe factoring for capital growth and writing off the losses against ones taxable income is a legitimate value adding feature of a property investment.

    Others, like yourself, see that the rental yield doesn't cover the expenses of the property therefore it isn't worth the investment if you don't factor for these other micro factors.

    So whether it is "worth it" or not depends on how you see value, what your time frame is, and if you have any more viable alternatives.

    Whilst there may be some "guesswork" involved in investing, it should always be at least of the form of "guesstimation" in that you should try and understand what causes price changes and then try and look to the data to see what the "likely" future of an investment is, but at the end of the day all investments have risks, but that risk is increased if you don't understand what you are doing - which just likens it then to gambling/speculating.
     
  3. robt

    robt Curious Onlooker

    Joined:
    29th Mar, 2010
    Posts:
    4
    Location:
    Melbourne, VIC
    Thanks very much for your explanation, Chris.

    I will certainly factor in the micro elements the next times I'm considering an investment property.

    Regarding capital gains, what kind of statistics can we use to do our estimation so that we can work out a number figure (e.g.: after 10 years the estimated capital gain for the property is x% - y%)? Is calculating the moving average of the suburb's median price reliable enough?

    Also, is there any source you'd recommend for getting the historical property sale price in a particular suburb?

    Thanks.
     
  4. Jacque

    Jacque Team InvestEd

    Joined:
    16th Jun, 2005
    Posts:
    1,885
    Location:
    Sydney
    Hi Rob

    Residex provide 10 year average rates for both cg and rental yields. I'd recommend their quarterly report in whichever state you're looking to invest. Property Information, Capital Growth Predictions, Rental Information from the Experts: Residex Good value at $90.

    Don't forget that, whilst initially an investment won't be likely to be returning you a positive cashflow, like all good things, give it a little time and you will start to see the benefits as the yield rises. In the current environment of low vacancy rates, this may well be sooner than you think.