The appeal of an investment property to potential tenants should be at the forefront of an investors mind, as it's the tenant who will pay the rent and ideally take good care of the property. However, possibly more important, is the appeal to future buyers even if the investor has a buy-and-hold strategy. This is because demand from owner-occupiers, rather than investors or renters, is the key driver of capital growth over the long-term.
Owner occupier appeal is one of the core aspects to look for in an investment property, because these buyers statistically represent the largest segment of the market, according to the Australian Bureau of Statistics (ABS) data. Residential real estate is not dominated by investors, it is dominated by people who have the basic need for survival.
A good strategy comes down to understanding that property is about people. Who really wants to live in your property – not to just rent it but also to buy it? It is not only important to be mindful of what appeal your property will have to prospective tenants, but you should also know your future buyer. Owner-occupiers are more emotional regarding their property decisions than investors, who are primarily motivated by financial return and are more likely to pay a premium for a property that ticks all the boxes, while investors are more likely to walk away if the numbers do not stack up.
Many investors base purchasing decisions on rental yield, as properties with high rental returns are more likely to be positively geared. To maximise capital growth, smart investors should consider selecting properties that will appeal to affluent buyers, as owner-occupiers who earn more can borrow more.
Despite the higher price tag and lower yield, an 'investment-grade' property is driven by broad demand. Smaller properties (such as studios and 1-bedroom units) appeal to singles and couples, properties in regional areas appeal mostly to local owner-occupiers and investors, but without the diverse employment options found in the capitals, affluent buyers can be limited.
On the other hand, a free-standing two or three-bedroom house 30 minutes away from the CBD would appeal to a larger number of more diverse buyers. It is true that at the end of the day, the property you buy will be determined by your investment budget.
Look for properties that are in the medium price range, as those above the medium range may have yields that are too low with increasing holding costs. Good locations such as those near transport, schools, shopping and lifestyle amenities will mean your investment properties' value will increase faster than less sought-after properties, from increased demand and low supply of these propety types.
Despite the occasional higher price, lower yield and a potential shortfall between rental income and expenses, an 'investment-grade' property is more likely to generate greater wealth for the investor through strong, long-term price growth.