Acquisitions: The impact of rental properties on yours
When evaluating a potential buying opportunity, some people worry about the amount of rental properties in the area and the impact that it may have on their prospective investment.
The percentage of rental properties in a particular area or suburb can indeed influence the performance of your investment to a certain degree. How it affects the property and the extent of its influence will, however, vary from property to property.
If we were to generalise, some might say that areas with a high proportion of rental properties don’t present as well. Some investors prefer to avoid such places considering it a sign of a bad suburb. While this can be true, it’s not necessarily enough reason in itself to discount the area. In many cases these types of areas are often ripe for rejuvenation, and if you buy in before this happens, on the best street, with a property oozing potential, then you may just be on to a winner. Remember, Subiaco wasn’t always the perfectly manicured, popular suburb it is now.
More of a concern in areas with a high amount of rentals is what the properties directly surrounding your prospective investment are like. Do they appear to be well cared for? Are they owner-occupied or rented? If rented, are they rented out privately or by the government? Being right beside your property, these will probably have more of an impact on the potential performance of your property than the overall rental nature of the area.
Others may see a high proportion of rental properties as a good sign in that there is demand for rental accommodation in the area. This is also true but there’s a flipside to this; more rentals means more competition, both when it comes to renting out your property and selling it in future. It’s preferable in such areas to try and purchase a property that has desirable and/or unique features or aspects that make it stand out from all the other “cookie cutter” homes or that offer future value-adding opportunities.
So, as an investor should you be concerned about buying into an area that has a high percentage of rentals? Is it better to target suburbs with few rental properties? Unfortunately, there is no straightforward answer to this question. It would seem that areas with lower proportions of rentals may be less risky in some respects (assuming there is of course demand from tenants to live in the area), but potential gains may not be as strong as in suburbs poised for gentrification that may have more rentals at the moment. Additionally, high performing properties can be found in both scenarios and this is because evaluating the rental state of a suburb is just one factor that should be investigated when selecting an investment property.
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