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The property deal breakers that aren't

April 15, 2014

Property investment asset selection philosophy should boil down to three words: ‘be really picky.’ Indeed, much of our working week is saying “no, net, non and nicht.”

This predilection for the no word is a simple function of an onerous asset selection filter for would-be investment properties.  Well over 95 per cent of properties that come our way are ruled out because we’ve judged that they’re located in the wrong suburb or the wrong street or because of the floor plan, the level of renovation, security concerns, the amount of accommodation, the architecture, car parking issues and so on.  It’s fair to say we disappoint a lot of estate agents!

Given our exacting ways, it can be a little bemusing to sit across from clients who, very occasionally, when presented with an investment property recommendation borne out of exhaustive research, send the ‘no’ word back in our direction.

It usually turns out that they have preconceptions about ‘must have’ features for an investment which, actually, aren’t imperative at all.

So here are some of the nice-but-not-necessary features of an investment property and why you can live without them.

Houses that are detached

The conventional wisdom associated with always investing in a detached rather than a semi-detached or terrace property is wrong. There are many examples of good quality semi-detached and terraced houses that work well as investments. 

The determining issue is context. What you don’t do is invest in the anomalous property type for the location.  In an area where the detached house is the predominant style, one is unlikely to invest in a house in a rare terrace block. But we're more than happy with a heritage worker’s cottage in suburbs where lines of well-maintained terraced silhouette the landscape.

A third bedroom/study

On paper, a third bedroom seems a good idea.  It opens up possibilities of renting the property to bigger families or to three professionals or to those who want a spare room to use as a study and a sojourn for visitors.  But our experience is that the combination of rental yield and capital growth often drops when the proposition changes from a two-bedder to a three-bedder.  Three-bedroom houses usually don’t generate the same intensity of rental demand relative to their supply as their two-bedroom counterparts. The two-bedroom house is a rental market sweet spot.  Inevitably, persistent strong 2-bedroom rental demand transmits across to the sales market, and drives strong capital growth for this type of asset.

Second bathroom/ensuite

For many owner-occupiers a second bathroom – in particular, an ensuite to the master bedroom – has almost become a necessity in the last decade or so.  Nevertheless, what may be necessary for keeping your home up with the Joneses isn’t necessarily the case for most investment properties – at least not yet.  That’s because most renters of one- and two-bedroom properties appear satisfied without a second bathroom, and we’ve seen no evidence that sufficient numbers are willing to pay a premium rent that would justify the extra cost of building one.  Indeed, installing a second or ensuite bathroom could even detract from the property’s appeal if it robbed the property of living space.

Apartment balconies

Apartment balconies are popular because they deliver a much sought-after outside living space that softens that remote-from-nature and restricted living-space feel that some apartments otherwise possess, as well as providing extra light and natural ventilation.

There tends to be some areas where apartment balconies are more common.  Typically they are more prevalent in older apartments in leafy blue chip inner suburbs built in the 1930s-50s that were built with owner-occupiers in mind. They are the type of properties that might also include undercover parking and/or bay windows.

In contrast, many apartment blocks built in the 1960s and 1970s in then blue-collar (but now long gentrified) suburbs were marketed by the developers to the rental market. The developers typically eschewed design flourishes such as balconies, purely as a function of cost and return.

So the reality is that there are some great investment spots where balconies are rare. But we know that these balcony-less properties make great investment.

Similarly, whilst balconies are more common in the blue chip suburbs, you would also be cutting your nose to spite your face to turn down an apartment in Toorak or Vaucluse that ticked all the selection boxes except balcony.

Perhaps the only valid reason for turning down a property without a balcony is when it’s one of the few properties in an apartment building without one – so the exception to the norm for that building. In this instance, the lack of a balcony is glaring and likely to see the property underperform the others in the block.

Off-street parking for houses

Our golden rule for apartments is that they must have off-street parking as this is highly valued by renters and future buyers.  Off street parking is not required for houses, as long as it’s possible to obtain an on-street parking permit – and ideally two.

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All of the features outlined above are great to have. But don’t lose sleep if you can’t obtain them.  It is usually worth trading off these features in order to buy something both in your budget and otherwise of very high quality.

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Image: Stuart Miles