Updated: Jun 27
Real estate is full of cliches I know (Position, Position, Position springs to mind), but this headline isn’t generally front of mind when on the hunt for an investment property. Understanding the local rental market is paramount when searching for an investment property. Unless you are fully across “Who” is going to pay you the rent needed to make the investment stack up, you are literally flying blind. You need to be confident there is long term demand.
As a general rule, the further out from the CBD (or major hub) you go, the larger the property should be. If you’re looking in Turramurra or Croydon, the dominant rental demand is going to be for 3-4 bedroom houses. Three stations from North Sydney or Town Hall though and the two bedroom unit comes into its element. And in the inner city itself, one bedrooms and studios will also be sought after by tenants (especially close to universities/colleges etc).
However, I always caution clients wanting to enter the market with a studio. Despite generally offering a more affordable entry point to the inner city market, they present some practical obstacles. Moreover, there are a couple of hidden idiosyncrasies to consider too.
For twenty odd years now banks have had a 50sqm limit on property size when it comes to lending. Below that and they start getting nervous, which is code for higher rates &/or bigger deposit requirements. I’ve seen studio apartments as small as 20sqm (not much bigger than the average car space).
But there is another downside to really small rental properties that I noticed in over 20 years experience in agency. Studios are too easy to move out of!
Anyone who’s moved in the past 5 years will know that it is a nightmare of a job. Packing everything into endless boxes, dismantling furniture and generally discovering how much stuff you actually have (especially in the “spare” wardrobe). This nightmare can also be a deciding factor in retaining good, long term tenants. Nobody wants to put themselves through that without good reason.
But imagine if your tenants could literally move in a day? Four boxes, two suitcases and a mates ute for three hours? This is one reason, studio apartments and small one bedders experience higher turnover in tenancies. And higher turnover means higher vacancy rates and that that leads to agent fees (advertising and letting).
When it comes to property investment, buying the right property for the area is the most important ingredient. Looking after the property and looking after good tenants in order to retain them is also important. But just remember, you don’t want to make it too easy for a good tenant to bid you farewell.