23-Steps To See If An Investment Property Is Any Good (Or Not)

LM b W

Laine Moger

Journalist and Property Educator for 6 Years
Introduction

How do you tell if a property is a good investment or not?

While every Kiwi has their own opinion on what makes a “good investment”, here at Opes we use a 23-step checklist to make sure properties measure up.

This is broken into 5 key areas:

  • Location
  • Developer
  • Willingness for the bank to lend
  • Building checklist
  • Pricing

With so many properties out there, you can use this 23-step checklist to sieve through the fodder and sort the good from the not-so-good investments.

It can be as high as 2 in 5 that won’t make the grade.

In this article you’ll learn what each of the 23-steps are, and how a recent property we recommended to investors measured up against this checklist.

Case Study

What’s the Example Property …

To see how you’d actually use this checklist, we’ll compare a recent property Opes recommended to investors – a development of townhouses located in Mangere Bridge, Auckland.

This Coronation Road development has a range of 3 to 4-bedroom townhouses, priced between $785,000 and $1.3M. The project’s developer is Oaks Living.

Coronation Road Picture 1

So, let’s dive in.

Location

Section #1 – The Location

First on the list is location. It makes up steps 1 to 6 of our 23-steps.

#1 – Does it have strong historical capital growth in the region, suburb or build-type?

If a suburb has achieved strong capital growth in the past, there’s probably a reason for it. Perhaps it’s an attractive place to live; the suburb is gentrifying, or the population is growing.

You can use this capital growth to then look for reasons why the strong capital growth might continue in the future.

You can find this data, here on the Opes website, up in the property markets section.

How did this property measure up? The Coronation Road development is located in Mangere Bridge.

Between January 2000 and June 2020, this suburb had average annual capital growth of 8.06%.

That puts it in the top 20% of all Auckland suburbs when ranked by capital growth.

#2 – Is the region in an appropriate part of its property cycle?

Not all regions increase in value at the same time. Wellington house prices might be skyrocketing, while Auckland remains flat for a time.

That’s where we use a model like this, to see where a region is within its property cycle:

house prices in auckland vs NZ

At the time, Auckland appeared to be 5.96% undervalued, through this model. That gave us the confidence to recommend Mangere Bridge as an area to invest in.

You can find all of this data - again in the property markets section of this website.

#3 – Is the population growing quickly?

High population growth is correlated with higher capital growth. An extra 1% of population growth per year indicated an extra 0.4% of capital growth per year.

The Coronation Road development is located in Auckland. Auckland’s population is expected to increase 36.8% from 2018 – 2043. That’s among the fastest in NZ.

#4 – Does the area have high employment and lots of job opportunities?

Jobs attract people. So if there are opportunities for work, the population will follow. This is a positive sign for your ability to get and then hold down a tenant.

The unemployment rate in Mangere Bridge at the time we recommended the Coronation Road development was lower than the Auckland average – 3.9% vs 4.1% as at the last census.

#5 – Does the city have diverse industries, or is it a one-horse town?

If you’re investing for long-term capital gains, you don’t just care about the here and now. It’s also about the long term.

That’s why it’s best to look for areas that have diverse employment opportunities, because then if one industry faces a tough time then there are still other businesses where your tenants can get jobs.

Queenstown’s rental market was severely impacted by Covid-19, for instance, because the town has one industry – tourism. Take that away and your house price and rental income will suffer.

When we looked at the Coronation Road development, on the other hand, we saw it was in Auckland. The “city of sails” has the most diverse economy of any region in New Zealand, and GDP per capita is in the top 20% of regions.

#6 – Is it close to new or soon to be built infrastructure?

Infrastructure – like motorways, public transport and bridges – opens up new areas of a city, making them more accessible than before.

So, newly-built infrastructure can often give a suburb’s property market a boost.

For example, these Mangere Bridge properties were close to Waterview Tunnel and the new airport development. The tunnel cut down the time taken for tenants to drive into the city, and the airport development will provide greater employment opportunities for tenants.

Developer

Section #2 – The Developer

Next up, we put the developer under the microscope from steps 7 to 10.

#7 – Is the developer in a solid financial position and able to complete the development?

If you’re investing in a New Build you need the developer to complete the job.

Sure, if they can’t complete the development you’ll get your deposit back. But you will have lost years of time where you could have invested in a different property that was built.

So you need to have the confidence that your developer has access to funds to build the properties.

In the instance of the Mangere Bridge properties, Oaks Living (the developer) had strong financial backing from a non-bank lender. And here at Opes we had been introduced to Oaks through their funders.

This gave us the confidence to say, “Yes, the money is there to complete the project.”

So make sure you ask the developer if they’ve got secure finance to build the project.

#8 – Does the developer have a good reputation for the quality of build, product, finish, and delivering what they say they will?

This one is obvious. When buying a New Build you’re purchasing something that hasn’t been built yet. So you need to trust the developer. The only way to trust that they’ll build a good product is through their past experience and reputation.

In this instance, Oaks had previously built two developments for Opes investors – one in Manurewa (South Auckland) and one in Silverdale (North Auckland).

This is a good example, where a small developer can have a good reputation and delivery, even if they’re not a nationwide brand with 154 5-star Google reviews.

That’s why it can pay to ask around the industry to get a sense of the developer’s reputation.

#9 – Is the developer a reasonable person to deal with when things go wrong?

This one is a bit harder to figure out if you’re not in the industry. But, you’ve got to remember that in property … things will go wrong.

So you want to work with someone who’s going to come to the party and be reasonable.

This is another area where you want to talk to people who have got experience with the developer you’re working with.

In this instance, having worked with Oaks in the past, we knew they had been reasonable and good to deal with.

#10 – Is this an all-inclusive turn-key build?

When buying off the plans, you might think the property will come fully finished. But not all do.

For instance, it is common for investors to sign a contract, not realising that the property won’t come with curtains, appliances, heat pumps, landscaping or a letterbox.

So you need to work with your lawyer and developer to figure out “what does this price/package not include?”

In the instance of the Mangere Bridge development, the properties were all turn-key builds which came with curtains, heat pumps, appliances and landscaping.

Finance

Section #3 – Getting Finance From the Bank

The next section covers step 11 and 12, and makes sure the property is worthwhile in the banks’ eyes.

#11 – Does the development have a strong gearing advantage, and will the banks lend against the security of the building?

The bank won’t lend the same amount of money for every property. You might need a 50% deposit for some types of apartments, and only a 20% deposit for others.

So if you don’t have a big deposit, or oodles of equity, you’ll often gravitate towards properties that the bank will lend a lot of money against.

This is one reason Opes tends to favour New Builds, which generally require a 20% deposit, as opposed to existing properties, which require a 40% deposit.

In this instance the banks were willing to lend up to 80% of the money to purchase these New Build townhouses in the Coronation Road development.

Investors then only required a 20% deposit, which they could borrow against their own homes or pay in cash.

#12 – Is this property widely insurable?

If you can’t get insurance on a property, good luck getting a mortgage. The banks won’t lend money against a house if there isn’t any insurance.

In some cases there are properties that can’t get insurance, for instance earthquake damaged homes or properties in flood zones.

In other areas insurance may be unaffordable and only offered by specialist companies. That makes insurance hard to get.

This tends to be the case for some apartments in Wellington where there is seismic risk. In that case insurance can cost up to $10k a year.

But what about our Auckland case study? Insurance was organised through a residents’ association and was easier to get since it was a New Build.

Building

Section #4 Building Checklist

#13 – Are there healthy and acceptable yields for the growth expected?

A property’s yield isn’t always everything, but it is still important. So you want to invest in a property that has an acceptable yield for the amount of capital growth you expect.

For these Mangere Bridge properties, the most affordable properties were expected to achieve a gross yield of 4.35%. This is above average for Auckland yields. And Mangere Bridge is in the top 20% yielding suburbs in Auckland.

#14 - Is there a good demand from tenants for the type of property?

Every investment property needs a good tenant. So you want to make sure that tenants want to live in the property you buy.

Let’s say you buy an apartment in the middle of Gore. You’re probably going to struggle to find a tenant since most people in small towns tend to live in standalone houses.

Whereas plonk that apartment in the middle of Wellington and you’ll have tenants galore, since an apartment is what people expect in the middle of the capital.

The Oaks Living development was a large project of 3-bedroom townhouses. This met tenant demand since 32% of properties rented in Mangere Bridge have 3 bedrooms.

#15 - Would the tenant you’re trying to attract want to live in the property?

Investors need potential tenants to want to live in their properties.

Vacant properties are costly, and generally after 2 weeks of vacancy your cashflow will start to be greatly impacted.

That doesn’t mean you as an investor need to want to live in the property. But it does need to be desirable for your tenants.

For instance, if you have a big family and a big dog, you’ll probably need a big standalone house. If you’re investing in a studio apartment, that might not be somewhere you would live, but it could be the perfect place for a university student if it’s in the right location.

Desirable properties are visually appealing, and close to local amenities such as shops, schools, public transport and motorways.

The Coronation Road development fell well within these specifications. Close to a local industrial area and the motorway, with a primary school a 6-minute walk down the road.

# 16 - Does the property have an appropriate finish and spec for an investment?

While it is important for any property to be well-built with good quality materials, for an investment property the materials need to be priced appropriately.

By this we mean the quality of materials for a home you plan to rent to tenants will differ from what you might kit out your forever home.

For instance, a “high-spec” property might add a lot of cost without attracting the same amount of rent.

That is one reason more expensive properties tend to be lower yielding.

The Coronation Road properties, while well built, aren’t overtly luxurious. Instead, they’re good properties built for regular families on normal incomes.

#17 - Is the property built of robust and low maintenance materials?

In addition to the points made above, it is important the materials used are easy to replace if needed, considering they might be subject to more wear and tear.

For example, those luxury tiles imported from Italy will look great in your own bathroom. But it might get a bit costly, and difficult, to replace if a tenant breaks one.

The Coronation Road townhouses fall within the suitable material category. Not an imported tile to be seen.

#18 - Are the grounds and landscaping going to be relatively low maintenance for tenants?

It’s very easy for properties to start looking a bit scruffy and unloved if the hedges aren’t manicured or if the lawns are left unmown.

And most importantly, not all tenants own a heap of gardening equipment.

That’s why lower maintenance grounds tend to be more attractive to a tenant than a property with a garden they’ll need to give up their weekends to maintain.

As a townhouse, the outdoor spaces of Coronation Road are pretty small and compact, which means easy to maintain for tenants.

#19 - Is the property built to meet Healthy Homes Standards?

This is a big one.

All rental properties must meet the requirements for Healthy Homes standards. So, this is a must for any potential investment.

That means heat pumps installed, ventilation in the bathrooms and kitchens, and enough windows that open to the outside.

The Mangere Bridge development will be built to Healthy Homes standards. And here at Opes we wouldn’t recommend a property that didn’t meet these standards.

Check out our Healthy Homes for a more in-depth discussion about what is required to meet the standards required, and find out where most properties fall short.

#20 - Are the expenses appropriate? Is the cashflow going to work?

If your property has large ongoing costs cashflow is likely to be impacted.

For instance, if you buy into an old apartment, your body corporate fees could well be over $5k (in some instances). This will massively impact the cashflow of your investment, making it a bad deal.

Similarly, leasehold properties attract a high gross yield, but can have extraordinarily high ground leases, so it’s generally best to steer clear.

Generally, a 3-bedroom townhouse should have operating expenses between 30-40% of the rent collected.

You’ll want to check whether your total expenses fall within this range – including rates, insurance, maintenance, accounting, property management and body corporate fees.

In terms of Coronation Road, the operating costs are estimated to take up 31.4% of rent, which falls nicely within this range.

Pricing

Checklist #5 Pricing

#21 - Is it priced appropriately and affordably as an investment property?

Properties need to be appropriately priced to be viable as an investment. If the initial price is too high, the return on investment won’t work and you may find yourself “topping up” your investment out of your own pocket.

And from the research we’ve done, higher-priced properties earn substantially lower rental returns.

The Coronation Road properties came in at 33% underneath the average house price in Auckland, which slotted them into the category of an affordable investment.

#22 - Is it priced at or under its valuation?

You don’t want to overpay for a property. No investor wants to pay $1 million for a property only worth $950k.

That’s why it’s really important to either:

  • Get a valuation done – even for a property that isn’t built yet, or
  • Work with a property investment company, which can tell you the market rate.

In the instance of the Mangere Bridge properties – the units sold in the early stages of the development were priced at $785k. This was below their $800k valuation at the time.

Units in the later stages of development were priced at valuation.

#23 - Will lots of people want to buy the property off you when it comes time to sell?

It’s no good waiting all this time for capital growth to build up if you can’t sell the property on when you want to.

There are some properties, like student accommodation or hotel units, that will only ever appeal to investors. That can make it harder to achieve a premium price when it comes time to sell.

The townhouses at Coronation Road are expected to have long-term appeal to first home buyers and owner-occupiers, particularly in the next 15 years when townhouses will be even more accepted.

Conclusion

What Should I Take Away From All This?

Ideally, the aim of the 23-step checklist is to offer a broad overview of what to look for when selecting an investment property.

You want to scrutinise the purchase from all angles, and make sure you’re not making an emotional decision.

If you run the checklist over two properties you’re considering, this should help you figure out which one is better.

If you’re working with us here at Opes, every property you are shown will come with a property pack that goes through this exact checklist.

This includes a considerable amount of economic information and analysis. For example, the Coronation Road property pack ran to 23 pages.

LM b W

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.