Steps to Take Before Buying an Investment Property

Step 1: Explore Areas with the Highest Rental Yield

Rental yield is an important number if you are investing in a rental property. It refers to the amount of income your property generates from rent. The higher the percentage, the more cash flow the property generates. Supply and demand have a lot to do with high rental yield. When there are fewer properties available, the demand will naturally be higher. As a result, people are willing to pay higher rents to get a home in that area.

The condition of the property, amenities, transportation, etc. all impact how much rent you can charge in a certain market. Do your research and look for the areas with the highest rents and compare that rent to the average cost of a rental property.

Ideally, you want to have a 6.0% gross yield or more to ensure your expenses are covered. Keep in mind you will pay more for a property in a high-demand area, where the rents are also high. You obviously want to cover your mortgage payments, the expense of upkeep and still see profits to make your investment work for you. As well, you want to see profits the first year, and not have to pay any of the expenses of your investment out of your own pocket.



The higher the yield, the better your cash flow and the more lucrative your investment. Gross rental yield is calculated by dividing your annual rental income by the property value and multiplying that by 100. For net rental yield, you need to consider your expenses for the year. You subtract them from your annual rental income and divide that by your total property cost and multiply that by 100.

Step 2: Look for the Best Possible Capital Growth

It takes knowledge of the market, supply and demand across Australia, and fair prices to target the best areas with capital growth potential. Buyer’s agents who are ‘in the know’ have a methodology to find the right properties that offer the best possible capital growth. When your rental property provides a high rental yield, you are already ahead of the game.

However, you also want a property that will increase in value and that will allow for increased rent as inflation increases. Capital growth builds wealth with minimal effort and is the driving force behind your basic property investments. Although it is based on the premise that prices always move upwards, you also need a smart investment strategy in locations offering the quickest growth potential.

This is one of the reasons supply and demand are so important. For example, in the suburbs, supply and demand are more balanced, as the outlying land allows more development opportunities. As a result, the capital growth potential here is not as big, as there is enough land to add more inventory to the housing market.

On the other hand, an area where land is limited is more likely to face issues meeting demand. Real estate investment allows you to increase value as long as you do your research. Things like feasibility studies tell you how quickly prices will rise, so you can determine if it makes sense for a short-term investment, or only makes sense over the long term.



Your budget also comes into play, so you want to get the most value for your investment. Looking outside the areas you have in mind is always important if you want to see the best possible capital growth.

Step 3: Value Add Potential

The third step is based on what opportunities lie in value add potential. Premium property in an ideal location doesn’t have value add potential so your opportunity to build even more equity is limited. A small house on a massive lot offers plenty of value add potential, as you can build equity over a few years, and leverage that equity to subdivide the property and sell or rent the two or more houses to make more money. Another opportunity would be a home that’s in poor condition but in a highly desirable neighbourhood.

You can invest in cosmetic renovations to bring the property up to buyers’ expectations and sell it for a higher price. Whether you look for short-term value add opportunities such as a cosmetic renovation, or a longer-term investment where you sit on a large property longer to see demand increase and build a few homes to increase your equity, value add potential allows you to take your investment to the next level.

The more value add potential a property has, the more equity you grow, and the further you can grow your portfolio. Subdivisions or full construction projects require more “sweat equity” than investing in a high yield rental property, but they will also greatly increase your own wealth potential. Your current income, access to capital, and age all contribute to the type of value add property you should purchase. Age is important as it impacts whether you have the time for long-term growth. As well, your goals determine if you can hold onto the property longer to see the equity, or if you should look for a property providing short-term wealth instead.



These three steps are easier with the help of an investment property buyer’s agent. We can work with you to create a property investment strategy based on your wealth-building goals, income and available capital. We can also continue to assess the market so you can leverage the value of the properties you own and access more equity when the time is right.