Over the last few years the Sydney and Melbourne property markets have gone gangbusters.
But in both of these markets, despite staggering property price growth, there are a number of properties I would still avoid at all costs.
Because it’s not just important to get the location right when you’re investing in property; you also need to be in the best quality properties, with the best growth prospects, in order to create a real estate portfolio that delivers long term wealth.
So which are the investment types I would avoid?
1. Student rentals
I’m not saying that renting your property to students is a bad idea.
I’m saying that investing in a property that is explicitly designed for, and marketed to, a target market of students only is a poor investment choice.
These types of properties have a limited tenant pool of just university students, which limits rental growth, but most importantly, these types of properties historically experience low capital growth.
An investor asked for my opinion on one of these blocks on the Gold Coast a few months ago and within five minutes, I was able to show him that the property he was looking at last sold for $10,000 more than the current asking price… nine years ago.
2. Studios or apartments of less than 45m2 in size
For most investors, the banks are going to eliminate this option for you, as risk-adverse lenders are increasingly refusing to lend against these types of properties.
They perceive them as being “risky” and I tend to agree.
I’m not a fan of tiny properties because they appeal to a very small target market of singles only – perhaps a couple at a stretch – and they require larger deposits to buy (as banks lend a lower Loan to Value ratio on these properties), which also restricts your potential resale market.
There are far better places to park your investment dollars than an asset with such a restricted rental and resale audience, in my view.
3. Oversupplied big-box apartment complexes
You’ve likely heard some of warnings about apartment market oversupplies in various markets across Australia.
In the main, these concerns relate to the ‘big box’, large-scale complexes that offer hundreds of identical units to the market at once.
Just think about it: what happens when the project is completed?
Dozens and dozens of properties purchased by investors will be released to the rental market at once… and if you’re a landlord in that building, you have no scarcity value or ‘unique factor’ within the property to help you entice a tenant and stand out from your neighbours.
4. Expensive apartments at the top of the market
In the current market, these types of investments deliver tiny yields.
Paying $2m for a property that rents for $1,200 a week equates to a miniscule yield and you can do far better than that by diversifying your investment dollars across several smaller, more affordable properties, as long as each of these properties is investment grade.
This type of property tends to be more volatile – prices tend to boom in good economic times and slump when the economy or business sentiment languishes.
5. Old houses that require significant structural repairs
Unless you really know what you’re doing, and I mean you have the runs on the board in planning, strategising and executing a large-scale renovation – I would recommend against this strategy.
It can be a fast way to lose money for those who lack experience, as it’s hard to recoup your spending if you go over-budget – and you almost always will!
Starting with a smaller, less complicated cosmetic renovation is a far safer way to go initially.
All of the above scenarios are investment types that I would personally avoid, but it doesn’t mean they will always constitute a “bad” investment choice.
Property investing is ultimately a game of risk and no result is guaranteed.
But by advising my clients to avoid the above properties, and instead focusing on good quality, widely appealing blue chip property assets, we’ve been able to tip the risk-vs-reward needle in our clients favour more often than less.