Purchasing an investment property isn’t something that should be entered into lightly. There are a range of external forces at play that can impact the suitability, and success, of an investment strategy. Understanding how these work is a must for anyone looking to purchase property for investment.
Changes in interest rates can have a huge impact on whether a property is affordable, and remains so. When interest rates are low, more people can afford to purchase, which pushes prices up. When interest rates rise, demand decreases as it becomes more expensive to service the mortgage.
It’s important to be aware of all interest rates you are paying on your investment property mortgages. If the gap between the income you’re receiving from the property no longer meets your requirements of servicing the mortgage, the costs of holding the property can eat into your everyday cash. Sometimes this can be remedied with a rental increase, but only if demand in the rental market can support it.
Supply and demand
The amount of housing stock in a certain area, and the number of people wanting to get into – or out of – that stock, can greatly affect an investment. For instance, if you hold a property in an area that is rezoned, or is subject to significant infrastructure development (such as new transport lines, a hospital, school or shopping centre) demand can skyrocket, pushing up prices and the value of your property, and most likely rental incomes.
However, the reverse is also true. If you’ve bought a property because of the local mine or manufacturing plant, and this operation ceases, you could find your investment shrink in value and desirability as people move away to seek work elsewhere.
The changing demographics of a certain location can also impact on an investment. Demographic changes such as migration, sea- and tree-changers (and the retirement of Baby Boomers in general), as well as the changing nature of family units and the way people live together can impact on what kinds of properties are desirable in which location. That five bedroom home may be seem a great price, but if it’s in a town full of downsizers and is going to sit empty while you wait for a tenant, you’ll be left footing the bill for that vacancy.
Significantly, however, there are ways to mitigate some of the effects of these external factors. Different properties in a range of markets, such as commercial, travel and student accommodation, can all offer different strategies to investors to help balance some of these effects.
Serviced apartments, for example, are located in areas that are in demand to corporate and business travellers, and so aren’t subject to many of the same forces as residential real estate. Serviced apartment companies such as Quest Apartment Hotels invest heavily in researching locations, undertaking extensive due diligence to ensure that each site meet a strict criteria.
This means demographics can have less of an impact, because the serviced apartment market is targeted at a more niche group (predominantly business and corporate travellers), whose demands and needs are well understood and less likely to fluctuate.
In addition, the way serviced apartment leases are negotiated is hugely different to regular residential real estate. Long term leases are arranged for the property, giving investors the assurance of regular income at a set rate, for a much longer period than the usual residential 12 months. This certainty assists investors with planning, and gives greater clarity at the outset of what the potential impacts of changes to interest rates could be.
Of course, there are always other factors to consider, not the least being your budget. But for those looking for a market that offers a different model to residential real estate, serviced apartments are well worth investigating.