AS PUBLISHED IN KEEPING IT REAL ESTATE – EDITION 2
Australia is a very big country, so it may be daunting to begin the process of understanding where the right location to invest in property might be. But it doesn’t have to be overwhelming. With a few handy hints and a defined path, you should be able to decide for yourself where and what type of property investment might be right for you.
And not surprisingly, the best place to buy an investment will vary from one investor to the next because it depends on what you want to achieve, how much money you have and what your tolerance to risk may be. Let’s explore in more detail how to find a location that will deliver the results you are after.
1. Define your Investment Goals
The very first step, is actually quite simple, but often overlooked. As an investor, you need to understand what your property investment goals are. You already know where you are, but you need to define where you want to go and then put the steps in place to get there. Some investors are looking to increase and supplement their income now, and others are looking to build long-term wealth for the future. Some investors may also have the capacity to add extra value to a property through renovation or development. The skills that you have may help with the steps to achieving your goals, so it is a good idea to understand what type of investor you are going to be.
Goal setting is also important so that you understand what type of strategy will be required and therefore what locations might be best suited to your investment strategy. The timeframe and risk appetite of an investor for achieving those goals also matters because this helps to determine location and investment strategy. Property investing should never be a one size fits all approach because there are a lot of variables that should be considered based on an individual investor’s personal circumstances.
2. Understand what investment strategy you wish to implement
Once your goals are clearly defined, the next step is to understand the investment strategy that is right for you. For low risk investors, the strategy might be a simple buy and hold approach. For others who may have more time available, or have some level of home improvement skills, a buy and renovate strategy may work. And then, for those with a higher budget and a higher risk appetite, a buy and develop strategy might suit. What ever the strategy ends up being, there are obviously some geographical constraints to some strategies – especially if you intend to get your hands dirty and do it yourself. These all need to be factored in to selecting the location that will best work for you.
3. Understand the Supply and Demand for an Area
The one thing fundamental to all property prices is supply and demand. You can get an idea of the supply of new dwellings by seeing how much land is available in an area that is yet to be developed. Some suburbs are what we call “land banked” suburbs which simply means the only way the density of housing can be increased is by infill development as there is no spare land available. So, new supply can come in the way of higher density development as well (think townhouses or multi-level unit developments). Understanding the dwelling approvals and building commencements for an area may also help you to determine if the area you are considering may be impacted by new supply to the market in the foreseeable future.
Demand can also be influenced by a number of things. Population growth to an area usually indicates increased demand as people need somewhere to live. New jobs created in an area, the development of infrastructure and an improving local economy is likely to also increase demand. Suburbs that are gentrifying, as evidenced by a changing demographic, more cafes and lifestyle precincts are also more desirable and therefore likely to be in higher demand.
Studying the vacancy rate trends of a suburb can provide some insights into the underlying supply and demand for rental properties in an area and can uncover seasonal trends that can impact on the investment return for a particular location. Often very low vacancy rates can also be a sign of very high demand in an area, and this can sometimes result in upward pressure on prices.
Having a good understanding of all of these drivers at a local level in the area you are looking to invest, will help you to determine if there are a lot of properties, but not enough buyers (which tends to result in prices stagnating or dropping) or alternatively if there are not enough properties available for buyers but an increasing number of buyers looking to live in an area (which tends to result in upward pressure on prices).
4. Study the ripple effect
Riding the wave of the “ripple effect” in property can have its advantages in identifying a suburb that is likely to grow in value in the near future. The way experienced investors identify these areas is by studying the suburbs that have already experienced a high level of growth, and then looking at the nearby suburbs that share many of the leading suburb’s characteristics. Of course, this needs to be considered with caution, because the “ripple” suburbs need to have features like access to quality schools, leisure facilities, health care, transport and infrastructure that match as closely as possible the features of the suburb that has already experienced the superior capital growth. Combined with the other tips, this can be a useful strategy to identify those suburbs that are likely to experience some superior capital growth in the years ahead.
5. Understand the demographics of a location
Identifying who lives in a certain location can help you as an investor to understand who your tenants are likely to be. Demographic data such as household income, median age and % of owner occupiers to renters can provide a snapshot of the area you are looking to invest into. It is always important to understand, based on this type of information, who a suburb is made up of as this often helps to determine if the suburb is right for your strategy.
6. Consider the Rental Yield
Achieving a high rental yield is obviously important if a cashflow strategy is going to help you achieve your property investment goals. But determining the rental yield of an area can also be a helpful indicator to determine where to invest for other strategies as well.
Areas with higher rental yields are often made up of a high proportion of investors, but not necessarily a lot of people looking to buy. The percentage of owner occupiers to renters is usually out of balance with the natural distribution of buyers in the market at any time. This means that capital growth can often be compromised as the property value is not driven by owner occupiers (who tend to buy with more emotion) but rather by investors (who buy with a calculator).
This can result in higher risk when it comes time to sell, as it may take longer to offload a property when the size of the market is restricted when the dominate target market is limited to property investors.
7. Select an area you are confident will deliver results
When planning your next investment property purchase, location is the key to getting the results you desire. The land component is the part of the purchase that usually appreciates over time, whereas the building component depreciates. The best advice I can give is don’t invest in a location, unless you understand all of the above indicators about that area. Then if that location matches your goals and strategy you can move forward with confidence. If not, don’t just jump in for the sake of it because you could be exposing yourself to risk.
Property Investment should involve a lot of research to ensure you achieve your desired results. If you don’t know what or how to find the location, get expert help. And even then, ask your advisor to provide a detailed description of why a particular location may have been recommended for you. Ultimately if you are spending the money to purchase an investment property, you should be confident that the location, and the property itself, will deliver the results you are after.
Buyers Agent & Qualified Property Investment Advisor (QPIA®)