Investment checks: what to look at before you buy a rental property

Rental demand

Is there steady demand for rentals here?

A property only earns if it is rented. Look for evidence that people want to rent homes like this one, in this place.

• Look at the rental listings near the property: how many similar homes are available, and whether the same ones stay listed for a long time.
• Think about who would rent it, and whether they can easily reach work, shops, schools and public transport.
• Be careful about relying on one suburb ranking or on someone else's forecast. Check the evidence behind it.

• Browse properties for rent by state
• Browse suburb profiles

Realistic rent

Is the rent I am counting on realistic?

The rent you plan on matters more than the price. Use rents that similar homes have actually achieved, not the highest asking rent.

• Compare the rent with similar homes nearby that are rented, not only with those still advertised.
• Ask more than one local property manager what rent they would expect, and why.
• Put a rent you are confident of into the rental yield calculator, and check the result still works if the rent is lower.

• Rental yield calculator

Holding costs

What will it cost me to own?

The running costs come out of the rent before you see any of it.

• List every cost for a year: council rates, water, insurance, strata or body corporate levies, maintenance and repairs, the property manager's fee, and land tax where it applies.
• Allow for some weeks with no tenant, and for repairs you did not expect.
• Land tax and other taxes differ by state and by how the property is owned. Check with your state revenue office and with a registered tax agent.

• Rental yield calculator

Cash flow

Could I manage if things go wrong?

Work out the worst case before you buy, not after.

• Test your repayments at a higher interest rate than today's.
• Test a stretch with no rent, and a large repair bill at the same time.
• Decide how long you could carry a negative cash flow, and what you would do if you could not.

• Cash flow calculator

The property's own risks

What could be wrong with this property?

Every property has risks. Find them before you own them.

• Order a building and pest inspection, and read the report.
• For an apartment or a townhouse in a strata scheme, ask for the strata records and read them, including any large repairs planned.
• Check the title, and check local risks such as flooding, bushfire and planning rules, with the local council and your state government.
• Get an insurance quote before you buy, so you know whether you can get cover and what it costs.

• Property checks & reports
• Buyer Due Diligence Report
• Title Search Report

Price

Is the price fair?

Check the price against what similar properties have actually sold for.

• Compare the asking price with recent sales of similar homes nearby.
• Be careful with a price guide. Ask the agent how it was worked out.

• Browse sold properties by state
• Research the value of an address

Management

Who will manage it?

Decide before you buy whether you will manage the property yourself or pay a property manager, because it changes your costs and your time.

• Managing it yourself saves the fee but makes you responsible for finding tenants, the paperwork, repairs and the law.
• A property manager charges a fee and other costs. Ask exactly what is included before you sign an agreement.

Advice

Who should I check this with?

A calculator and a checklist do not know your situation. A professional does.

• A licensed financial adviser, for how the loan and the property fit your finances.
• A registered tax agent, for how the property is taxed.
• A solicitor or conveyancer, for the contract before you sign it.

• MoneySmart: property investment (official site, opens in a new tab)