One of the biggest challenges facing many potential investors is funding. In recent years, housing loans have been difficult to secure, with banks and large lenders applying stricter criteria, even to buyers with excellent credit histories. This has made building a portfolio more difficult than ever and has complicated the entry of new investors into the real estate market.
It's here that comes into play affordability. With cheap properties, potential buyers can apply for smaller loans, which often increases their chances of being approved because the service is reduced – not to mention that the risk is lower for the lender.
"Because of their lower price range, budget properties require a lower deposit and have a lower mortgage repayment rate," says Peter Koulizos, coordinator of real estate investments and equities. Property Services Department of TAFE SA.
"Your council, your water royalties, your property taxes and other taxes should be proportionally cheaper, because your land is cheaper. And in general, the economic properties have a higher rental yield than the more expensive properties located in prime locations. "
Affordable housing is available throughout the country, in metropolitan and regional areas. In Tasmania, for example, houses can generate rental yields of up to 7%. Affordable homes can also have significant potential for capital growth – some budget suburbs have double-digit price increases.
In addition, budget properties can be a good foundation for a portfolio because they help you diversify your risk of leaving your properties vacant.
"I would rather have 10 properties worth $ 500,000 instead of a $ 5 million property. If you own 10 properties and one is vacant, then 10% of your portfolio would be vacant, "says Helen CollierKogtevs, Executive Director of Real Wealth Australia.
"However, if you have a property and it is vacant, 100% of your property is vacant. In addition, more people can afford to rent properties with a selling price of less than $ 500,000. "
Buyers must keep in mind that it is advantageous to buy properties at affordable prices, which is not a foolproof solution.
Here are some of the risks associated with the purchase of budget properties:
1. Budgetary properties may be badly situated
All affordable suburbs are not in poor places; however, from an investment point of view, they are not always located in areas full of growth drivers. This could mean that your portfolio is underperforming on rents and / or selling prices.
"It is important to research all areas under study to ensure that the fundamentals support your investment and that its growth prospects are promising," says Collier-Kogtevs.
Demographic growth, infrastructure projects and the presence of a considerable rental population in the region are signs of the potential for profit or capital gain from real estate.
"Buying a $ 500,000 property in front of a station may seem convenient; however, it may not be desirable for tenants, or buyers, to sell, "explains Collier-Kogtevs.
It is best to look for a house within walking distance of the train but without the roaring noise in their back yard.
2. Budget Properties Can Attract Problematic Tenants
With affordable housing, you can afford to charge lower rents, which can attract many tenants. However, if you buy in a low socio-economic area, you run the risk of creating a lot of problems.
"Tenants who target these types of properties may cause you more grief than tenants of more expensive buildings in prime locations," says Koulizos.
Properties located in such areas may also be more dilapidated, which could disable the type of tenant you want. You also want to look at crime rates and demographics in the suburbs, as well as the condition of the property, before you commit. A good property manager can help you avoid the troubles of a problematic tenant and manage potential problems.
However, if you manage your investments personally, you must be extra careful.
"Formulate a flawless tenant selection process and apply all due diligence measures," advises Koulizos.
3. Budgetary properties do not necessarily mean lower expenditures
The purchase of affordable housing may seem ideal for your surface portfolio. But in the long run, the bad property could cost you more than expected.
"Even though a property is cheap, it does not mean that all rental fees are proportionately cheap," Koulizos points out.
For example, items such as heaters and food services cost the same price regardless of the value of a property. A plumber will charge a reminder fee of $ 100, whether the property has a value of $ 200,000 or $ 800,000. If the house you buy ends up needing a lot of repairs and replacements, the money you think you have saved on a cheaper property will soon be chewed by the expenses instead.
While you can certainly add value to a property through renovation, you must ultimately determine if the process will cost more than your ability to earn if you rent or sell it.
"If you buy cheap, old-fashioned, and maintenance-intensive properties, you expose yourself to additional costs that will affect your cash flow," says Collier-Kogtevs.
All of these risks can be mitigated by diligently pursuing your research, inspecting potential properties and obtaining the right tenants. You can also balance your portfolio by investing in more expensive properties in more crowded locations to better ensure growth.
In addition, if you are aware of what is happening in the area, you will not only know where to buy, but also get you to a flourishing market early. Potential properties that could currently be undervalued include those that are close to the city and / or the shoreline, that have a collection of character homes or period homes in the area, and that are starting to show up. gentrification.
"I always like interviewing property managers about areas or streets in the suburbs in which a tenant would like to live. The answers help limit your search to a few streets, which facilitates the selection of a good investment, Dit Collier-Kogtevs.
"Keep up with growth, where people want to work and live, and where investments in infrastructure take place. Remember that real estate investing is long term, so it's important to have a long gambling mentality. "
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