Over the many years of working in the property industry, I often have discussions with potential investors that are a cause for concern. I hear a number of suggestions or phrases that are uneducated or do not convey an understanding of what they want to achieve or how to go about it. Comments or phrases such as;
- It’s an investment property, it’s not something I’m going to live in so it doesn’t matter if it doesn’t tick all the boxes.
- I wouldn’t live in it, but it will be fine for a tenant
- I have friends who have bought in the area so I think it’s a good place to buy
- The property is brand new so I will get great tax deductions
The types of comments, whilst alarming are totally understandable. If a prospective investor doesn’t work in the property industry or hasn’t had any experience in this space, how are they meant to know? In addition, with technology at our finger tips, there is often so much conflicting advice in the marketplace.
If you are considering purchasing an investment property, there is one frequent mistake you need to avoid and that is: Buying property for TODAY.
What do we mean by this?
Residential property should be viewed as a long term investment. History has shown us that property cycles in Australia last between 7 – 10 years. Therefore we encourage investors to experience a full property cycle so they can maximise the benefits of leverage (if relevant) and compound growth. In addition, the entry (stamp duty, solicitors fees etc) and exit (selling agents fees) costs in property are quite high, therefore the longer you hold an asset, hopefully the more you can wash these costs out via the performance of the asset.
IMPORTANTLY, you also need to consider who you want to appeal to with this property. If your goal is to hold onto the property for the long term, who will your property appeal to when you look to sell it in 10 or 20 + years’ time? Brand new property can have a place within a property portfolio however too many times we witness people buying their first investment as a brand new house and land package or a unit in a large complex with the enticing features of strong tax offsets (depreciation), prospective cashflow forecasts or one of my personal favourites, “for the cost of 2 coffees per week you could own an investment property”.
What these investors fail to consider is what the asset will look like in 10-20 years’ time when they want their portfolio to mature or when it comes time to sell their property. A new property today is not new in 10 years’ time.
As an investor, you should look for some of the following:
- Properties that have unique, desirable features
- Places where people want to live, close to amenity, transport and entertainment
- Properties with owner occupier appeal
- Areas where there is limited opportunity for future development in the near vicinity to assist with restricting future supply
- Gentrifying areas and areas where people are re-investing into their homes (renovating)
- Streets that are within walking distance to shops, cafes, schools, etc…
It is rare for all of the boxes above to be ticked in a developing or emerging area, new land development or in a new unit complex.
If we look at the two separate images below, this is a simple portrayal of the difference of the areas. The image on the left is Springfield Lakes which is 40km from Brisbane CBD and the image on the right is Paddington which is 4km from Brisbane CBD. As you can see, the potential for future development in Springfield Lakes versus Paddington is very different. There is very clearly supply restrictions in an area that is well established with no more virgin land, as opposed to an area with a lot of vacant land that can be developed.
So where should I be buying and how can I pick the right market?
Property does not need to be over-complicated or over-scienced, the fundamentals of demand and supply are the core driver of property prices (in amongst other considerations). Simplified, this means when there are more buyers than sellers, the values will likely increase and when there are more sellers than buyers, the values will likely decrease. But while this is the case, some areas will perform better than others for a number of the reasons mentioned above as well as infrastructure projects, school catchment zones, proximity to transport and many others attributes.
To maximise the return from your investment, you need to be in areas where there will be strong owner occupier demand and emotion driving the purchase price, not areas that are driven by purely investors and the bottom dollar. An emotional home buyer who falls in love with your property will always pay more than an investor who is making a calculated decision.
In summary, if you are looking to invest in property, it is extremely important to ensure you are not purely buying a property based on how it appeals to you TODAY. Think about what that asset will look like and who it will appeal to in 10, 20 + years. Don’t let short term incentives such as tax benefits, rental guarantees etc.. impact your investment decision. You need to be forward thinking, conduct thorough research not only on the area but the potential tenant and buyer profiles in years to come and understand the fundamental drivers of the area before making an informed investment decision.
If you would like to speak with me or one of our team members to better understand how PMC assists our clients with their property investment journeys, please contact me directly on firstname.lastname@example.org or send an email to email@example.com. Alternatively I can be contacted on 0435 807 759.
Alternatively please complete the enquiry form on our Contact page and we will be in touch to see if we can assist with reviewing your existing portfolio or discuss how we may be able to assist you with your future property investment plans.