What makes a good investment property – Checklist for novice investors
For many people, real estate investment is an attractive way to grow their wealth and generate passive income. However, taking the first steps as a real estate investor can seem challenging, especially when it comes to choosing the right investment property. So what kind of property is a good investment? In this article, we take a closer look at the checklist for beginner investors and highlight important aspects of a successful property purchase. Careful selection of the property is key, as it minimizes risks and maximizes long-term return potential.
Location is key
Location is definitely the most important single factor in real estate investment. A good location guarantees demand and rentability for the property, which in turn has a direct impact on the return on investment and resale value. It is important to consider what kind of location will attract your target group (e.g., students, families, singles) and what factors will affect the value of the area in the future.
Apartments in central locations are often in high demand, as they offer good transport connections and nearby services. Nearby shops, schools, daycare centers, and public transport increase the attractiveness of an apartment and make everyday life easier. The proximity of workplaces and educational institutions is also an important factor, as it often ensures more stable demand for rental apartments. Also, find out about the general safety and livability of the area.
The development prospects for the area are also very important. Is the area experiencing growth and development? Are new services, employment areas, or infrastructure improvements (e.g., a new tram line) planned for the area? Positive prospects increase the value of apartments in the long term and make the investment more profitable. Familiarize yourself with the area's zoning and the city's development plans.
Condition and features of the apartment
The condition of an apartment has a significant impact on its attractiveness and rentability. An apartment in good condition is easier to rent at a suitable price and requires fewer immediate renovations, which saves time and money.
Before buying an apartment, it is important to carefully check its overall condition. Is the apartment tidy and well maintained? What is the condition and age of the kitchen and bathroom? Are there any signs of moisture damage or other significant defects in the apartment? If necessary, have a professional inspect the condition of the apartment, especially in older properties.
Renovation needs should also be carefully assessed. Does the apartment need minor surface renovations (painting, flooring materials), or are there any major renovations planned for the building? Extensive renovations in an apartment can be expensive and time-consuming, so their impact on the profitability of the investment should be carefully assessed. Remember to budget for renovation costs as well.
The floor plan of the apartment is also important. Is the apartment functional and efficient in terms of square footage? Are the size and location of the rooms suitable for potential tenants? For example, in studio and one-bedroom apartments, the efficiency of the floor plan is emphasized. A balcony or yard increases the attractiveness of the apartment and can raise the rent level and living comfort. Also consider the brightness and sound insulation of the apartment.
Condition and finances of the housing company
The condition and management of a housing company affect the value of an apartment, maintenance charges, and living comfort. A well-managed housing company is a sign that the property is being taken care of and its value is better preserved.
The age of the housing company is an important factor to consider. When was the housing company built? What major renovations have already been carried out (e.g., plumbing, facade, roof, window replacement)? Carefully review the housing company's maintenance plan (PTS), which lists planned future renovations and their estimated costs. Future renovations may increase maintenance charges (both maintenance and financing charges) and significantly affect the profitability of the investment.
It is also important to check the amount of maintenance fees. How high are the maintenance fees compared to other similar apartments in the area? What do the maintenance fees cover (e.g., water, heating)? High maintenance fees can eat into your investment returns. Also find out about the status of any land lease agreements (owned/leased land, when the agreement expires, what kind of pressure there is for an increase).
The financial situation of the housing company should also be carefully examined. Familiarize yourself with the company's financial statements, annual report, and budget. Does the housing company have a lot of debt in relation to its size and condition? Does the company have cash reserves or a repair fund? Have any decisions been made at general meetings regarding future loans? A small housing company may be more financially vulnerable in unexpected situations.
Rental levels and returns
Before buying an apartment, it is important to calculate its potential rental income. Calculating rental income helps you compare different properties and assess the wisdom of your investment. Many factors affect the rental level, such as the location, size, condition, and amenities of the apartment. Actively compare the rent level with other similar apartments in the area and make sure that your estimated rent is competitive and realistic.
What is a good rental yield?
The goal of a real estate investor is, naturally, to achieve the best possible rental yield. A good rental yield covers the costs of the apartment (maintenance fees, any land rent, insurance), loan servicing costs, and also generates positive cash flow or at least covers all costs. But what constitutes a good rental yield?
Generally speaking, the rental yield on an investment property should be at least 4%. At this level, the investment is usually long-term and the investor is also looking for an increase in the value of the property. A rental yield of 6–9% can be considered good, and over 10% excellent. It is important to understand whether the return is calculated on the debt-free price or on the equity capital, and whether all expenses are taken into account in the calculation.
What kind of rental yield percentages (calculated on the debt-free price) can be expected? (I added a clarification on the price at which the yield is usually calculated in these contexts).
- Poor (less than 4%): At this level, rental income may not be sufficient to cover all expenses and loan servicing costs, especially if the apartment has been purchased with a high level of leverage. The investment may still be profitable in the long term due to significant appreciation (e.g., central areas of the capital region), but it will not generate significant cash flow on a monthly basis.
- Good (4–9%): At this level, rental income generally covers expenses and loan servicing costs and also generates a reasonable cash flow. This is a realistic and desirable level of return for many investment properties in Finland's growth centers.
- Very good (over 10%): At this level, rental income is excellent and generates significant cash flow. Such properties can be difficult to find in good locations, and finding and purchasing them at a competitive price often requires detailed market knowledge, quick reactions, and possibly successful price negotiations.
Tenant demand is also an important factor to consider. Are there many applicants for rental apartments in the area and for this type of apartment in particular? Competition for tenants can affect rent levels and the rentability of the apartment (vacant months).
Other things to consider
- Equity and financing: How much equity do you have available? What kind of loan can you get from the bank and on what terms? Financing solutions affect the profitability and risk of the investment. Calculate the return on equity (ROE) and cash flow accurately for different financing options.
- Investment strategy: Is your goal to buy and hold an apartment for the long term (Buy & Hold), or do you want to make a quicker profit, for example, by renovating and selling (flipping) apartments? Different strategies involve different risks, requirements, and opportunities.
- Risks: Be aware of the risks associated with real estate investment: Tenant turnover, vacant months, rent defaults, unexpected renovations in the building or apartment itself, rising interest rates, and falling apartment prices can affect the profitability of your investment. Consider how you will prepare for these risks.
- Expenses: When making a purchase, remember to take into account the transfer tax and any brokerage fees. In addition to maintenance charges and loan servicing costs, running costs include insurance and any annual repairs.
- Background work: Always do thorough background work before making a purchase decision. Carefully review all documents and feel free to ask the seller, property manager, or real estate agent for additional information.
Summary: Checklist for a good investment property
Finding a good investment property requires careful background work and evaluation of several factors. Remember to make realistic calculations and compare different options. Don't be afraid to ask for advice from more experienced investors or industry professionals. Here is a summary of the key points to check:
- Location: Is the location attractive to target tenants? Services, transport links, jobs/educational institutions? Safety and development prospects in the area?
- Condition of the apartment: Overall condition? Age/condition of the kitchen and bathroom? Renovation needs? Functionality of the floor plan? Energy efficiency?
- Housing company: Age and completed/planned renovations (PTS)? Maintenance fee level and content? Land ownership? Financial situation (debts, assets)? Size of the company?
- Yield and figures: Realistic rent level? Calculated rental yield (%)? Expected cash flow? Tenant demand?
- Your situation and risks: Financing (equity, loan terms)? Investment strategy? Risk tolerance and risk preparedness (empty months, interest rates, renovations)? All expenses taken into account (including transfer tax)?