The number of property renters in Australia is rising as homes become less affordable to buy. This is good news if you own an investment property because maintaining a good occupancy rate is crucial to your investment success.

During the property boom of the 1990s, investment properties were all about capital gains; properties often jumped in value whatever you bought. That’s no longer the case. Now that the boom has passed, investors need to be more selective about the properties they buy.

Step 1 - Location
For a successful investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind - in both terms of good rental potential and capital growth.

Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth.

The property needs to be located in a safe, clean, attractive environment and the area will have an already established high rental demand.

Step 2 - Buy quality
The quality of the property is crucial.

The building must be appropriate for the market - for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise.

It should be well-built (brick and tile is desirable) and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are in good order).

If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution.

Step 3 - Gross versus net returns
You’ve collected your rents (the gross return or yield) and now it’s time to pay out all your investment expenses.

You are then left with the net return or yield. This net return is this figure you need to capture regularly in order to understand how your investment is travelling.

While rents may not rise so quickly, sometimes the cost of the investment fluctuates and it is this you must keep a close eye on.

A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you a rough idea of the net return before tax.

Step 4 - Coping with vacancies
Around 30 per cent of all Australians are renters, providing a huge pool of around 5.4 million people who are housed in or looking for rental accommodation.

Vacant properties can spell real trouble for the investor and are a security risk.

You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week.

However, a well kept, appealing property in good condition and in the right area should not be vacant for long periods.

If you are managing the property yourself and having difficulty finding tenants, you might want to approach some local property management agencies to see if they can help (for a fee, of course).

Step 5 - Triggers for failure

• The purchase price was too high.
• The property is in an area of low capital growth potential.
• The property is too high maintenance.
• The rent is too low.
• Vacancy periods are too long or too many.
• The loan taken out was structured wrongly.
• Some tax deductions are missed.

Step 6 - Top tips
Because of depreciation entitlements on properties (including the purchase price, the construction price and the land value), units generally provide higher depreciation and can often provide a better return than houses.

Revalue your properties every year, so that you can use your additional equity to negotiate a larger loan which you can reinvest in another rental property.

If you find the right property, buy it. Don’t be put off by the economic cycle. Even in the worst recession, there is always a suburb growing in value and producing good rent.

By Perrie Croshaw (www.news.com.au 17.10.2007)