One thing this latest buzz of investor activity in the property market has demonstrated yet again is that some newcomers to the real estate game still insist on going in blind.
These first-timers operate under the assumption that any property makes a good investment and that if things don’t quite pan out, well you can always just offload it and walk away, right?
No, not really!
Property investing, as with any type of financial activity that requires taking on large amounts of debt, has an element of risk attached.
And it’s this risk that you want to mitigate with thorough research, before diving headlong into a deal.
Successful investors know that smart property investments are acquired via a sound investment strategy, around which is built careful planning and research.
So here are the five essential ‘subjects’ you should do some homework into, in order to make it all the way to the top of the property ladder.
1. Your financial capacity and risk profile
Deciding on an investment strategy, based on your long-term investment goals, is critical.
And in order to do so, you need to understand your financial position and capacity to purchase an investment property, as well as how much risk you can handle as an investor.
You can undertake this process with the help of a suitably qualified financial or investment advisor.
Just remember though, free or seemingly ‘cheap’ advice can be very expensive in the long run, so don’t be afraid to pay for a sound, honest assessment of your position.
It may be that you have to wait a while to actually begin your investment journey once you know where you stand, but at least you’ll have a timeframe and with that in mind, can prepare by moving on to research…
2. Your property investment team
It takes a lot of combined and complementary knowledge to create a successful property investment strategy and portfolio.
It’s important to find advisers who have personally successful track records in property investment and ones that have a holistic approach and are part of a great team including a suitably qualified accountant, financial adviser, mortgage broker, and buyer’s advocate.
Conversely, you need to be aware of people who are not necessarily looking after your best interests (like real estate agents who work for the vendor), property promoters and spruikers, or ‘armchair’ experts who are largely unaware of market fundamentals, let alone your personal financial position.
3. Your preferred property market(s).
Once you identify your investment strategy, you should have a clearer idea as to the type of location that will best complement your plans.
Remember, not all land is created equal and while many of the properties on the market at any given time might be fine for a family home, they may not be what we consider an "investment grade property."
You need to qualify potential locations based on the history of capital growth achieved and the likelihood of future capital growth based on the demographics of the area (the local residents' ability to afford to keep buying property) and the local supply and demand factors.
Then drill down into the best street in that suburb and the best side of the street in that suburb.
Look for areas that have outperformed the long-term averages with consistency.
Selecting the optimal location is about facts and figures, so never invest in a place based on whether or not you would want to live there, but whether it appeals to a broad owner-occupier and tenant demographic.
- Does current or future projected demand look set to outstrip supply and underpin values for some time to come?
- Is the area undergoing gentrification? Gentrification is a change in the fortunes of a suburb as it is discovered by a higher income demographic which slowly pushes out the lower-income residents. These new, more affluent residents invest time and money improving their new neighbourhood, pushing up prices and rents.
- Is there a lot of spending (private and public) on infrastructure upgrades and development?
These are the types of questions you should ask.
4. Your best property investment
Once you have the location sorted, it’s time to think about the type of property that will best suit your investment strategy and the market in which you're purchasing.
Remember, no two suburbs or streets are alike and you’ll always find pockets of real estate that represent more or less potential in any given area.
Usually, properties within close proximity to essential amenities, targeted toward the primary demographic of the region, will be in greater demand and therefore, dominate when it comes to capital growth.
For instance, in suburbs that are family-friendly you want to be close to the best schools and healthcare.
For younger resident demographics, the walkability factor (walkable suburbs will outperform in the future) and ease of access to things like public transport, shops, and cafes will prove popular with tenants and buyers alike.
5. How much you should pay
Once you identify a likely contender for your portfolio, you need to make sure you don’t pay too much for it and lose essential upfront capital.
There are numerous market research companies that provide reports on the sales history of a property and/or comparable properties for a small fee, so you can undertake this research on your own.
The other option is to engage an investment savvy buyer’s agent who should have sufficient knowledge of the local real estate market to advise what they believe the property is actually worth.
Don't stop there!
Importantly, successful property investors recognise that once they have acquired a new asset for their portfolio, the research doesn’t just end.
Rather than resting on their laurels, this is the time that smart property investors really kick it up a notch, critically evaluating their portfolio’s performance on an annual basis and ensuring they maintain an optimal investment and finance structure to maximise their gains and minimise their risks.
This includes considerations like how you structure your investment ownership, manage your investment-related debt, and create the optimal tax position – all factors that will change over time as you grow your portfolio, but that careful forward planning and research can better prepare you for, today.
