Read this before buying an investment property

There are 100s of people out there running seminars and charging customers well in excess of $10,000 to reveal their ‘magic sauce’ of buying real estate. The truth is that buying investment properties is actually quite simple when you have the cash or equity to do so. Property is priced the same as anything else in the economy: through supply and demand. So investors need to ask themselves two questions when looking at areas to invest in. Do people want to live there now and will they want to live there in the future. Given that real estate is a long term investment the second question is more important. These questions would also rule out mining towns. Sure, you may buy a property in Kalgoorlie that doubles in value in 12 months and pays 12% rental return but when the mining is done you’re left with a property in Kalgoorlie.

So by cutting out all the bullshit that is out there that people love overcharging for this blog post will break down the simplicity of investing in property.

  1. What’s your strategy?

Whilst somewhere in Utopia there are investment properties that give you cash-flow + capital growth they are not that common in our world. You need to choose rental return or capital growth. The table below from Investmart shows that out of the 10 highest growth suburbs in Australia only 1 had a rental yield of more than 5%. But Waratah is a university town and well they are a beast on their own. But more on that later.

propertyoverview

 

Traditionally areas that increase the most in capital growth are what are known as 1st tier suburbs. Generally close to a major city with dense population. Positive cash-flow properties are traditionally found in 2nd and 3rd tier suburbs like regional or rural areas. Again mining towns will impact on data. Remember that property is all based on supply and demand. So when a new mine opens up the mining company will generally fly in and accommodate all its staff members. Usually the population in these towns are small and an influx of rental demand will send the rental prices and yields sky rocketing.

2. There is more than one property market

Actually there are probably 100s of different property markets across Australia all doing their own thing. Here are a few examples

  • Inner Sydney Units
  • Western Sydney houses
  • Outer Melbourne units
  • Rural Queensland houses
  • Mining towns
  • Inner Brisbane units

So you can see that it’s no longer enough to look at the Australian property market as a whole because it doesn’t give an accurate overview. Below is an example from realestate.com.au. It shows the difference between 2 bedroom houses in a Western Sydney suburb vs 2 bedroom units in an Eastern Sydney suburb. Note that both locations make up the ‘Sydney property market’ but both have very different trends.

lpool

 

lpool2

 

rand1

 

rand2

These charts highlight how different property markets are. For a number of years Liverpool house prices were flat. However they have soared in recent years. A Cheeky Investor would know that you need to research the Liverpool market to find the reason behind the growth and if it is sustainable. Randwick on the other hand shows that an investor can expect steady growth over the long term. Make sure you know your market.

 

 3. What makes a good suburb?

When it comes into selecting what makes up a good suburb there a number of boxes that should be ticked off first.

  1. Council – Head the council website of the area that you are considering to invest in. Are they advertising any projects or developments that are coming up? Are they known for a pro-active council that supports development? Essentially the building of new properties to meet supply will rest with the council so it’s key to ensure they support growth.

2. Education – What type of education facilities are available and how many? University suburbs can be great. Because students can’t afford to buy property they have to rent. So there should always be a rental demand in that area giving good cash flow. If investors see that the area gives good cash-flow and they flock to take advantage of this, the demand has increased and so will supply. Having a number of primary and secondary schools available also contributes as it will appeal to a broader market.

3. Health – Essential for people of all ages a good health care system will support population growth and make the area more desirable. It’s not just limited to hospitals. Specialists such as dentists, physios and psychologists to name a few also contribute to the health care system. No-one wants to be told that they have to travel 2 hours to get an appointment with their closest specialist. Particularly if it’s for ongoing treatment.

4. Economy/employment – Essentially this explores the reason the town exists. How does it make money, create jobs and build sustainability? Tourism, agriculture and exports are examples of a local economy. Tourism encourages out of town people in to spend money within the economy. Exporting agriculture products or manufactured goods also brings money into circulation for the area creating a flow-on effect for creating jobs.

5. Transport – Trains in particular. How easy is it for people to access some of the things that are not available within that area? So a suburb may only be 30 minutes from a University town or big city. The ease of access to this will be appealing to a market of renters and buyers who want access to these services but don’t necessarily want to be living in highly populated areas.

The other point that I will briefly touch is around tourism towns. These places can be very much hit and miss in terms of property prices. And it has to do with consumer buyer behavior. Think that if you moved to your favourite holiday destination you would no longer have your favorite holiday destination. People like visiting tourist areas but not necessarily living there. This means that capital growth and selling your property can be difficult.

So there you have it. The basics of investing in property with a long term focus. Assuming that you aren’t overpaying for a property (get it independently valued!) these points will put you in the right direction. Perhaps your best investment in property is the due-diligence that you undertake before making the purchase so study up!

 

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