7 tips for researching and buying your first investment property

Here are seven tips that will help you organise your research and hopefully help you purchase a property that grows into a solid investment.

Decide on your investment goal

Starting the process of buying an investment property without a specific goal in mind is like planning a holiday without a destination in mind.

What do you really want from an investment property? Are you looking to gain a steady income source from rent? Or are you hoping the value of the property will rise quickly, allowing you to sell at a profit and make a capital gain? Your strategy could even be a combination of the two.

If you're planning on being a landlord in the long term, then you have to understand the obligations involved. The property will require maintenance over time, and you may need the services of a real estate agent or property manager to help you manage the property, tenants (i.e. finding suitable tenants, collecting rent and managing communications), and general maintenance.

If you're hoping to make quick capital gains, then you need to understand the risks involved if the market takes a turn for the worse. There are also some costs that you may not have considered when it comes to selling your property (real estate commission, conveyancing fees, stamp duty etc.) that could eat into your overall profits. And you may want to consider using an interest-only loan to minimise your expenses in the short term before selling.

Set your budget

Once you’ve decided what you want to achieve from your investment, you should work out how much you can afford to spend. To start with you should work out what your upfront costs are going to be and how much you have saved up for a deposit.

Once you’ve worked out how much you’ll be able to borrow, you can then decide how much you can afford to spend on the upkeep and maintaining your investment property. Start looking around to see what you can get for different prices and how much different areas will cost in upkeep (council rate, water rates, strata fees etc.), this will help you decide how much you’re willing to put in and give you a head start on your research.

Gather your data

Research is key for any property investor. You need to look at broad market trends in cities and suburbs and then look at particular types of properties. Try to get an understanding of the level of supply and demand in the areas you are interested in buying in.

Here are some data points you should look at:

• Vacancy rates and rental yields: This gives an indication of how popular the suburb is with renters and whether the demand for property is greater than the supply.
• Days on market: This tells you how long it could take to sell a property in a particular suburb.
• Recent and past property sales: This is essential information that gives you a realistic understanding of current prices in the area and how they have changed over time.
• Auction clearance rates: An auction clearance rate is the percentage of properties listed for auction that were actually sold. A high auction clearance rate in a suburb also suggests demand is strong.

You can find much of this information online at various property sites, but it's important to approach the data carefully. Try to look at recent sales data for comparable properties rather than average figures for all properties. If you're considering buying an apartment as an investment, then the auction clearance rate for large mansions in a suburb isn't very relevant.

Past data is important, but you also need to look at what trends and forecasts are saying. And this is where things get trickier. You want to buy a desirable property in an area people will find desirable in the future.

Investment property expert Michael Yardney recommends looking at "leading indicators" to get an idea of future supply and demand. "Using Australian Bureau of Statistics data," Yardney says, "I look for suburbs where people are able to, and prepared to pay a premium to live because their disposable income is growing above average.

Looking at future developments help guide you toward locations that will likely be desirable in the future. Things that can help improve demand include:

• Transportation
• Community organisations (childcare, schools etc.)
• Shopping centres
• Restaurants or cafés
• Entertainment facilities (parks, public pools, skate parks etc.)
• Community events

Hit the streets

There's no substitute for on the ground research. Once you have some idea of what you're looking for, it's time to hit the streets. Explore suburbs, go on as many inspections as you can, talk to real estate agents and attend a few auctions.

The more on-the-ground research you conduct, the more you'll understand the local market. It will help you understand what's a fair price for a property and what's a rip off.

Take emotion out of the equation

When you're getting ready to make a decision, make sure you keep your emotions in check. Purchasing an investment property is different to purchasing a home for yourself to live in. Keep all your data and research in mind and purchase a property that suits your investment strategy and not your personal tastes.

That's not to say you should ignore your gut instincts completely. But let your research guide your decision.

Get your funding in order

It would be a shame to go through all the hard work of researching and finding the perfect investment property only to fail to secure finance. Unless you can pay for the whole property upfront, you will need to get an investment mortgage to fund your purchase. A good place to start is to work out your borrowing power and how much a lender will lend you. There are 3 things (deposit, credit history, repayments) that will affect this and so it’s a good idea to keep these in mind when looking at home loans.

To get a mortgage, you will need to save a deposit and prove that you have the income to cover repayments. A 20% deposit will make your mortgage application easier, but many lenders will accept a 5% or 10% deposit (Tiimely Own for example, will accept a 10% deposit). Just keep in mind that you may need to pay if your deposit is below 20%. This extra cost protects the lender if you're unable to repay your loan. If you’re struggling to save up a deposit (and don’t want to use a low deposit option) try these 7 ways to hack away at your home deposit savings goal.

Get expert help

You don't have to go through the buying process alone, you can ask the experts for help. You will need to talk to real estate agents, and while they're working in the interest of the seller, they are still valuable sources of information. You'll likely want a good agent to manage the property for you too. Speaking to an accountant or property tax specialist will really help you get the most of your investment strategy and make sure you're doing everything by the book.

Finally, there are buyer’s agents who can help you find a suitable investment property. A good buyer’s agent will recommend properties, help you to avoid paying too much and can handle auctions and price negotiations.

Researching and buying your first investment property will be a challenging and often difficult process. But if you plan carefully and take it step by step, it will become much more manageable. And you'll hopefully make a better decision in the end.

Richard Whitten is a property expert at Finder, Australia’s most visited comparison site.