5 types of investment properties to avoid

Your first investment property doesn't have to be perfect, but it does need to be sensible. One way to reduce risk is to write a list of potential issues to look out for when you're viewing properties. Here are some we're always cautious about.

1. Small studio apartments in high-rise buildings

Studios can look attractive on yield. The rent looks high compared with the price. The problem is that many of these properties have had almost no capital growth in 15 years or more and some are still selling for less than their original purchase price. Lenders can also be stricter with small apartments, which limits your buyer pool in the future.

2. Off-the-plan high-rise apartments

Buying off the plan can involve an 18- to 24-month - or longer - build window. Your 10% deposit is tied up while you earn little or no return and a lot can change in that time. Interest rates, lending rules, your job, your health or the broader market can all shift before settlement. You also can't rely on a standard preapproval for an off-the-plan purchase. Pre-approvals generally last around three months, which is useless for an 18-month build. For a first-time investor, the added complexity and risk are rarely worth it.

3. Properties with major known headaches

For a first investment, be cautious about buying places that come with obvious high maintenance or structural risks, such as:

• large, old retaining walls that already show signs of movement
• private swimming pools and spas
• old fibro shacks that haven't been updated and may contain asbestos
• fireplaces that may not meet current rental safety rules in your state.

All properties have some maintenance, but if you can avoid obvious dramas on property number one, you'll make your life much easier.

4. Single-industry or speculative locations

Be very cautious about towns that rely on a single industry, particularly mining towns where yields look incredible on paper. Everything looks great until it isn't. If you want your first property to be a relatively low drama stepping stone, you'll usually want a location with multiple industries and a stable underlying population.

5. Large new estates where almost everyone is an investor

A new pocket inside an established suburb can be fine, but a brand new suburb where almost every buyer is an investor can be risky. You might end up competing with hundreds of similar properties for tenants, and rents may soften if too many investors try to undercut each other.

Overall, your first investment property should be as 'turn key' and boring as possible. Ideally, you want a property that someone can move into tomorrow. It might be an existing home with a long-term tenant already in place, or a new build that's finished and ready to lease, not a speculative off-the-plan purchase or a half-finished renovation that depends on your weekends and a miracle.

This is an edited extract from The Quick-Start Guide to Your First Property (Wiley, $34.95), republished with permission.