Where should I buy my next investment property?
If I had a dollar for every time I was asked that question, I’d retire a rich man…never mind the property portfolio!
But when it comes to purchasing residential real estate investments, there are generally two different approaches.
One will succeed at all stages of the property cycle, as long as you stick to some age old rules of asset selection and acquisition, while the other is a lot more risky due to its highly speculative nature.
It all comes back to…
The fundamentals or the fads
As a property investment strategist, I’m frequently quizzed at dinner parties and backyard BBQs about how to select THE perfect location in which to buy.
Now everyone seems to know that ‘location, location, location’ is key when it comes to purchasing real estate.
Yet interestingly, many people who ask me about ‘good locations’ often already have some preconceived ideas of their own about what these are.
I find when I start to discuss the enduring fundamentals that innately underpin all housing markets (it’s just a question of how and to what extent), they’ll start rattling off things like…
- What about areas where a lot of people can’t afford their mortgages and have to sell up? i.e. a lot of distressed sales?
- What about areas where a lot of new infrastructure is being built for a big event, like the 2018 Commonwealth Games on the Gold Coast?
- What about all the tax I can save with depreciation benefits if I buy a new house and land package in the outer suburbs?
My response to these would-be investors is usually something like…
What about those towns that sprang up virtually overnight on the back of a resources boom that was, according to the predictions of numerous experts, going to last for decades?
What about the investors who thought they’d cash in on soaring rental yields in outback communities that were built on one single industry, almost entirely reliant on the emerging Chinese economy?
Unfortunately I’ve heard stories of people edging close to retirement, who’ve lost their entire property portfolios because they purchased an Off The Plan residence in one of these regional towns.
When the inevitable recently happened and mining industry mania started to slow, or falter completely in some locations, many property investors found that the shiny new build they’d acquired only five years ago was now worth much less than the mortgage on it.
No magic bullet
The problem is, a lot of the latest fads and fashions that exert these quick bursts of upward pressure on property market pockets are the ones that generally receive the most airplay and attention.
That’s because large construction companies and consortiums are often involved and sudden spurts of infrastructure development usually create a bit of a fuss, particularly if it’s around an industry that’s essentially propping up the economy at the time.
The fact is though, the price growth we tend to see as a result of these magic bullet type approaches – where frenzied investors end up driving markets beyond all sustainability – reflects the abrupt ascent of property values on the back of this speculative activity.
In other words, it’s likely that these locations will produce disproportionate gains for a short period of time.
Because these ‘one hit wonders’ tend to exert a significant amount of influence on the local economic, employment and housing markets within such a concentrated timespan, the impact they have on investors is often to the same kind of extreme.
The question then becomes, will you get out at the right moment or linger that little bit too long and possibly lose the lot?
This is far too risky for my liking.
While it might not make headlines or represent the thrill ride some investors seemingly chase, for my money you can’t go past the…
Investors who fancy themselves as high rolling, buy low and sell high real estate moguls are really missing the point in my opinion.
The Trumps of this world didn’t make it to the top by speculating.
They followed a formula, based on their own investment strategy and financial objectives.
There was nothing sexy about it.
But look where it can lead.
When it comes to successfully identifying a prime investment location, the enduring fundamentals are where the sustainable capital growth is really at.
Supply and demand
The amount of developable land available in any given area, versus the appeal that area holds for owner-occupiers, is the key fundamental that underpins all else when it comes to what makes a location superior in terms of its long term growth potential.
Note that it’s owner-occupier activity you need to be aware of, rather than following a wave of unsuspecting investors into the latest fashionable product being spruiked by a clever developer.
That’s because the wealthy live where they want to live.
Owner-occupiers drive demand and therefore prices, based on their emotional response to housing.
People will pay more to be in a good school catchment area or a nice lifestyle location with low crime rates.
In other words, it’s about the depth of the market.
When there’s greater demand from buyers than there are sellers – usually because the area is multi-dimensional in terms of industry, employment and infrastructure – you find constant pressure on house price growth.
Don’t settle for a fad property investment
Remarkably, even though history demonstrates that house prices will always go up (give or take a few sideways or downward correction phases) across investment grade locations, a lot of people think there’s a ceiling of some sort on price rises and that they’ve ‘missed the boat’ in a particular postcode.
Often they’ll seek out these fad products in secondary or inferior catchments, thinking they need to make a quick buck elsewhere.
But what if they had it right the first time?
Are you not more likely to realise far greater capital growth in an area where you might have to enter into a few bidding wars with eager homebuyers, rather than walk away with a bargain because no one else is biting?
Sure, it can be difficult to identify prime locations where stock is limited but buyer demand is plentiful, because often they’re not making the same type of headlines as ‘flash in the pan’ property investments.
But it’s a test of patience. And when it all works out, you’ll be thankful to have such a proven performer in your property portfolio.
The end is your beginning
The first rule of investing is to not lose your money.
This is relatively easy to assess when you select a location with a strong, established owner-occupier base, where there are more family homes than rental properties.
Importantly, you should always have the end buyer in mind when searching for that proven property investment performer.
Remember, your asset needs to hold enduring appeal for the people who’ll own it after you (or buy similar properties to you pushing up the value) and can afford to pay emotionally to satisfy their heart’s desire.
Sticking to this basic principle of property acquisition means you can expect less volatility in your investment endeavours.
On the other hand, the more discretionary properties you hold – those without that enduring, underlying appeal – the more volatile your portfolio will be.