Written by Andi

A couple of years ago, a friend of ours purchased her first investment property.

She already owned a home -- well part of it, the bank owned the rest -- and she had worked up enough equity in the property to purchase another and start building her property portfolio.

The only problem our friend had, was she was ready to purchase right as the market started peaking and property prices were skyrocketing.

Against good advice, she decided to go ahead with her plan, and she started hunting around for a property, eventually settling on a town house in Western Sydney.

The property was one of a dozen just completed in a development, and the development was one of many already underway or scheduled in the area.

With demand for rentals high (as most buyers were unable to purchase or advised against it), our friend was fortunate to land a great tenant, above rental asking price and she looked all set for a solid return.

Cut to this year and of course the market has changed. The property bubble has burst, prices have fallen over a 12 month period, and in her area, values came back by more than 10 percent.

To add to her pain, her tenant's lease ended, they moved out and with high vacancy rates due to overstock in the area, she needed to lower the rent by more than $100 each week to fill the property again.

Right now, our friend is in a world of hurt when it comes to her investment, as the value of the property is less than what she borrowed (negative equity) and her rental income well short of what she needs.

Some of that hurt could definitely have been avoided with good advice and a little more research prior to purchase.

Before launching into your first investment hunt, why not consider our suggestions below.

1. How much will an investment really cost you?

Once you know what amount you think you can manage to spend on a property and you've had a look online to see what's available, do the math and think about how much this investment will really set you back.

A lot of investments are negatively geared, and while this has some tax benefits, if your shortfall is actually quite long, you may not be able to afford repayments.

While obviously you would hope to have a tenant in all the time, you need to consider how long you could cover the rent if vacancy rates are high (like in our friend's case) and a tenant is difficult to find.

Likewise, you need to consider that the rental estimate the agent has provided may not actually be achievable in all market conditions.

Think about our friend -- her original rent was great and went a long way towards meeting her repayments, but when the market changed, suddenly she had to find more than $400 extra every month.

Lastly, don't forget to consider all the costs outside repayments. As the landlord, you'll have to pay annual rates, water bills, agent admin fees, possibly strata fees, a percentage of each weeks rent and maintenance.

Once you add all of this up, you have a better idea of what an investment really costs.

2. What is your rental yield?

A rental yield simply refers to what percentage of a property's value is covered by the annual rental income.

To work out your rental yield, work out how much rent you'll have come in within a year (weekly rent multiplied by 52 weeks), divide that by your purchase price and then multiply the result by 100.

As an example, if your property was purchased for $550,000 before the boom, and it is now achieving $700 rent each week:

((700 x 52) / 55000) x 100 = 6.6%

While there is no steadfast rule, most advisers suggest searching for a property that delivers a 5% yield or more, with the Commonwealth Bank suggesting investors seek 5.5% or more.

Remember, you won't be bringing home all the rent that the tenant pays. Out of the rent will come the agent's fees and percentage and you will also need to cover off those aforementioned bills.

3. Is this your first property?

Something really important to consider -- irrelevant to our friend -- is first home owners incentives.

If you have not purchased a property in the past, you may be eligible for a range of different state and federal first home owner initiatives. These vary from loan guarantees to grants, but all can be incredibly useful in lowering your costs and increasing your return.

Ultimately, they can really help make the purchase of your first property less financially stressful.

Unfortunately, first home owner initiatives aren't available for investment properties -- to be eligible you will be required to live in the property for a specified period of time.

If this investment is your first property purchase, you may be eliminating your opportunity to ever draw on any of these great Government incentives!

4. Where are you getting your advice?

Let's be honest, most of us don't have our very own financial adviser -- as first-time property buyers, most people can't afford one, and by the time we get to buying our first investment... guess what? We still can't afford one!

For this reason, many people draw on advice from people they know. For many young people, this is their parents.

The trouble is, often, our parents are not experts in the property market and perhaps don't even have any investment experience at all. They don't know what to look for in a worthwhile investment, what math to do and what warnings you need to consider before diving in.

Relying on their advice could leave you in hot water!

Likewise, many people also rely on the advice of the real estate agent. The trouble here is the agent is actually only an agent for the property owner -- the seller -- he/she is not an agent for the buyer.

His or her job is to always work in the best interest of the property owner (within the required legislation).

With this in mind, while the advice the agent may provide might be expert, it might also be very biased, and designed to drive you towards a purchase that is absolutely in someone's best interest -- but that someone isn't you!

If you want independent, useful advice, hand over the cash for reliable financial consultation, go to a buyer's agent and seek their professional support, or, if you don't have the money, try to talk to as many other agents as you can -- unrelated to the property, so you can gather more information.

The internet is a wealth of information of course, but having some initial expert guidance can help you know what to look for and upon which sources you can rely.

5. Consider the market and the area

While the events of the last few years prove no one can really accurately predict how the market will fluctuate, there are signs to look out for that could influence the future value of your property.

To start with, if, like our friend, you are purchasing in a hot market, within which prices are inflated beyond what would be expected (and properties are being overvalued), it's important to know that what went up, will likely come down!

When buying at the peak of a booming market, very carefully consider the price and ensure you are getting real value for your spend.

It is also helpful to consider what else is happening in the area where the property is located. If new infrastructure is going up, this can be a great sign, as it might make you property more accessible and more attractive to a great buying audience.

But if new infrastructure is going up because an oversupply of new properties are also being built, consider what the old 'supply and demand' rules will mean for your property down the track.

When too many properties come on to the market at once, and there aren't enough buyers, property values can fall.


Real estate can be and often is, an excellent investment. It can be a way to set yourself up for a more stable and secure retirement or just a way to spread out your cash so it's not all just sitting in the bank.

Our friend's case is certainly not the rule, but what happened to her can happen to you, if you don't do your research right and consider all factors that will influence your purchase.

This article does not constitute financial or legal advice, please seek independent advice before making a purchase or deciding to sell.