It’s easy to get excited about being a real estate investor. We have all heard the success stories and how easy it is to get in on the action. We are told that it’s as easy as purchasing a property, renting it out, and collecting the checks. In reality there is much more you need to know.

Is it affordable?

Along with location, affordability is the most significant determining factor in buying a property. It’s not much use mulling over properties that are priced beyond your ability to pay back a bank loan. Banks will need to see evidence of your capacity to pay a deposit on the house, plus extra finances to cover legal costs and stamp duty. This requires reasonably substantial savings even before you can begin your chosen calling as a real estate tycoon.

What is the potential?

The opportunity to make a resale profit on your investment is the next important criteria worth examining. Value of your property depends on the location and fluctuations in the housing market. Patience truly is a virtue in real estate, with most profit attained when implementing the ‘buy and hold’ strategy. Avoid impatience and take the long term view whenever needed.

Most canny investors will purchase properties in high-rent areas, but it’s also worth investigating lower income demographic areas. Building up a property portfolio in lower-rent suburbs can lead to greater accumulation of properties with resultant total income outpacing a more conservative approach. It’s also a good idea to keep attuned to areas where population growth is high, employment is strong, and where governments and businesses are investing in infrastructure.

Rental yield equals profit

Rent from tenants should be geared to cover all loan repayment costs, and a little extra. In high demand areas it’s easier to advertise higher rents. More rent can be charged for furnished and luxury apartments. A rental yield above 4 percent is advisable. In growth areas, rental yields of 6 to 7 percent are common, and if you are fortunate enough to reach 9 or 10 percent yields you are living the investors dream.

Vacancies

Vacancy is a bad word in real estate. Your aim is to have your properties occupied at all times, preferably by happy, long term renters. When searching for properties, look for suburbs with vacancy rates below 3 percent. It will pay in the long run to investigate potential areas thoroughly. Ask the locals, walk the walk, and listen to residents aspirations and concerns about the suburb. It’s the best way to get an idea of real vacancy rates and often much more accurate than official rates that are often several months old.

Market intelligence is for smart investors

Nothing will help you as much as researching the present and future forecasts for the local economy. Stay attuned to news and developments regarding your investment area. Take time to get to know the area, or even live there for a while. It’s no secret that many of the most successful property investors live in the same suburb where they have accumulated their property portfolio. Investing locally means you can always keep your finger on the pulse of the local economy and developments that trigger opportunities.

I do recommend reading the NSW government’s property buying guide and Moneysmart’s “Are you read to buy?” post.