Investing in real estate, especially rental properties, remains one of the most reliable ways to build long-term wealth. However, before diving into the market, it’s important to understand the factors that can significantly influence the success of your investment. Whether you’re a first-time investor or adding to your property portfolio, considering these key factors will guide you in making smarter decisions when investing in a rental property.
Over the years, we’ve seen how residential property prices in Australia have soared. In fact, the average house price has risen by 78% in a decade, jumping from $547,500 in 2014 to $973,300 in 2024 according to Statista Research Department. In New South Wales, the mean price of residential homes leads the country at $1,222,000, followed by the Australian Capital Territory ($953,900) and Victoria ($900,300) (Australian Bureau of Statistics, 2024).
At the same time, the ongoing demand for rental properties presents huge opportunities for investors, offering the potential for strong returns and a steady stream of passive income.
These are just a few reasons why investing in real estate remains one of the best ways to grow wealth. Plus, it tends to be less volatile than other investment options like the stock market or cryptocurrency.
But like any investment, success depends on understanding key factors that can impact your returns. Ready to dive in? Here are 7 key factors to consider before investing in real estate rental property:
7 Key Factors You Need to Consider When Investing in Real Estate Rental Property
1. Location
When it comes to real estate investment, location is crucial—as it can make or break the success of your rental property. A prime location drives demand, boosts rental yield, and increases the long-term value of your investment.
So how do you evaluate a good location? Here are three important things to keep in mind:
Assessing Neighbourhoods
The proximity to universities, public transport, shopping centres, and healthcare facilities can greatly enhance your property’s attractiveness, leading to higher rental income. Think about it—when you’re renting a place, isn’t convenience one of your top priorities? Tenants feel the same!
Understanding Local Market Trends
Researching local market trends is essential in identifying high-growth areas. Look for factors like population growth, job opportunities, and infrastructure development, as these will greatly influence your property’s appeal. For example, if there are plans for a new hospital or shopping centre nearby, property values and rental demand could really start to climb.
Determining Climate Change and Risk Factors
It’s also wise to consider environmental risks and overall safety. Even if the location seems perfect, properties in high-risk areas prone to floods, bushfires, or extreme weather conditions may not be a good investment due to higher insurance premiums and reduced long-term desirability.
2. Property Type, Age, and Condition
Your overall budget will largely determine the type of property you invest in but don’t forget that the type, age, and condition of the rental property will also affect your initial and future expenses.
Choosing the Type of Rental Property
Before investing in real estate, you need to determine your target tenants and what level of maintenance is feasible for you. Whether you’re considering single-family homes, multi-family units, or commercial properties, each offers different benefits and target tenants. Residential properties often require more maintenance than commercial ones, but they also appeal to a wider range of tenants..
Assessing Property Age and Condition
Older properties may come with hidden renovation costs, so inspect the property thoroughly. For example, houses older than 10 years may already need major repairs. It’s a good idea to budget for ongoing maintenance to keep the property appealing to potential renters. It’s also a good idea to get a pest inspection and a building inspection report before committing to purchasing a rental property so that you can be fully informed.
3. Property value, Initial Investment, and Financing Options
Understanding your initial investment and selecting the right financing option are also key to your success in real estate.
Navigating Property Type and Value
Commercial properties can be more expensive than residential ones. A commercial property is often valued based on its current or potential rental income under a lease, while a residential property considers both land and building value.
Consulting with an accredited property valuer can help you better understand the potential income and resulting value of the property you’re looking to buy.
Recognising Initial Investment Costs
Consider all upfront costs, including the deposit, lawyers fees and transfer duty as well as immediate cost of repairs and possible renovations. Knowing your total investment will help you make a realistic decision before jumping into the market.
Exploring Financing Options
Shop around for competitive mortgage rates and terms when investing in real estate. For commercial properties, banks typically require a higher deposit (around 40%), while for residential properties, the deposit can be as low as 5-20%. Structuring your loans effectively, especially if you’re building a property portfolio, will help maximise your returns. Mortgage insurance can also be an unforeseen cost. This is insurance where you pay the lenders insurance premium so that they are covered if you default on your loan in the future. This is usually required if you borrow 80% or more of the market value.
4. Rental Demand and Growth Potential
In any real estate investment, much more on rental properties, a big determining factor to success is rental demand and growth potential.
Rental Yield and Cash Flow
Rental yield is a key metric for determining your property’s profitability. To calculate rental yield, divide the annual rental income by the property’s purchase price.
Rental Yield = (Annual Rental Income/Property Value) x 100
For example, if you buy a property for $600,000 and charge $2,500 in monthly rent, your rental yield will be 5%.
Rental Yield = ($2,500 x 12)/$600,000 = 5%.
In general, a good rental yield for residential property would be up to 5% gross, and up to 7% net for commercial properties.
Capital Growth Potential
Beyond rental income, think about the potential for capital growth—that’s when your property’s value increases over time. As more people move to the suburbs, the population grows, and with it, the demand for housing goes up—boosting the property’s value.
For example, in the past year, cities like Perth have seen house prices rise by 29.4%, while Brisbane and Adelaide experienced increases of 17% and 15.8%, respectively.
The key here is to maximise your investment’s long-term value by focusing on areas with development plans and increasing demand.
5. Maintenance and Renovation Costs
It’s important to foresee potential renovation costs before investing in real estate, especially with older properties. Don’t overlook maintenance costs and consider the type of property, age, and features. Unexpected repairs can quickly drain your budget, so it’s crucial to take a closer look at the condition of any property you’re considering. Make a list of all the big and small repairs needed, and see if the investment still makes sense once everything is factored in.
If you’re buying an investment property, it’s also smart to estimate how much upkeep it will need to stay attractive to renters. Planning for regular maintenance will help you avoid bigger, more expensive repairs in the future.
6. Property Features and Amenities
Standout features and modern amenities can make your property more desirable to tenants, leading to higher rental income.
Unique Selling Points
Properties with standout features like large gardens, scenic views, or energy-efficient systems can set your investment apart and justify premium rental prices.
Appealing Amenities
Modern amenities such as a second bathroom, a garage, and air conditioning and proper heating systems are also highly desirable to renters. These conveniences allow you to charge higher rent and increase the overall profitability of your investment.
While unique features and appealing amenities can definitely attract tenants, it’s also smart to think ahead. Will the property hold its value as trends change? Since the pandemic, more Australians are looking for flexible work arrangements or remote setups, so having a home office space can be a big plus for renters.
7. Legal and Regulatory Factors
Lastly, consider local laws and regulations when planning real estate investments as these can greatly affect your profits.
Understanding Zoning Laws
Zoning can affect your property investment, and it pays to understand how current and future planning laws will impact the type of property you’ll invest in. For example, in New South Wales, the Department of Planning and Environment uses local environmental plans (LEPs) as a tool for long-term strategic planning for local development.
With this guide, it helps determine whether a property is suitable for housing, industry, or recreation. Ensure that the property you’re eyeing complies with local zoning laws and rental regulations to avoid legal complications and improve your profitability.
To learn more about how zoning laws can affect your investment, reach out to an experienced property valuer.
Licences, Permits, and Taxes
Success with your rental property isn’t just about the right location or great features. You also need to stay on top of approvals, permits, and taxes, which can vary depending on where the property is located.
Knowing these rules ahead of time can help you avoid fines or unexpected hassles. Plus, this is where the interest on an investment loan as well as certain repairs and maintenance can be claimed as a tax deduction, reducing your taxable income.
Conclusion: Making the Right Investment
Investing in rental property can be both exciting and rewarding, especially when you’ve got the right knowledge on your side. By focusing on key factors like location, property condition, and market trends—and making sure you’re financially ready—you’re setting yourself up for success.
If you’re looking for expert advice on investing in real estate or need assistance with property valuations, feel free to reach out to us today. We’re here to help you make the best decisions and ensure your investment fits your financial goals.