When it comes to building your portfolio, the bedrock is often equity.
There’s no denying cash flow is an important component of serviceability, but long-term investors want to make sure they select property that has upside value potential.
Whether you’re buying blue-chip in our most in-demand suburbs or looking for a more modest holding in less salubrious locales, there are some universal truths you should remember for the best chance of securing capital gains.
1. Choose the right market
Property may be a nuanced thing, with all sorts of options across just about every suburb, but smart operators take a top-down approach to investing by making sure they’re in the right region at the very start of the search.
Investing away from your home town has become even easier in the age of electronic accessibility.
Not only are you a click away from spotting available purchases at any point on the Australian map, but you can email all the local experts to help you out, too.
This makes choosing the right market from the get-go even more important.
Property academic Peter Koulizos says it’s a good way to start your hunt for the right holding – although long-term investors shouldn’t get too hung up on fast equity.
“Certainly picking the areas that are about to pick up would provide you with some good equity gains over a good four- or five-year period.”
Once you’ve nailed the right region, get picky on the suburbs.
Most capital city markets operate like a pebble in a pond, where gains in a rising market start close to town and move progressively towards outer areas.
Have a think about which locations are next due for a surge to stay ahead of the wave.
According to Jane Slack-Smith of Your Property Success, it’s also no good finding the best market if you buy the wrong bricks and mortar, so take care.
“Find the property that most of the population want because that’s where the greatest demand is going to be.
For example, if 60 per cent of the people in Toowoomba (Queensland) are mum, dad and two kids, and you’re looking at a one-bedroom unit, potentially that’s not going to give you the equity growth you need, so get some risk minimisation in there to start off with.”
2. Look for future infrastructure
New infrastructure such as commercial and retail centres, schools, hospitals and even parks all spell benefits for associated suburbs.
Some works will bring more construction workers to the locality, which can mean more tenants on the ground.
Of course, working infrastructure such as universities and medical centres guarantee an upswing in local population with plenty of tenants to help drive demand.
Transport is another source for infrastructural gains.
Great upgrades to roads or rail often see commute times cut, bringing your suburb of interest effectively “closer” to town.
That said, Koulizos believes there’s a disconnect between what’s touted and what follows, so factor this into your considerations.
“With any new infrastructure going up, and state governments being what they are, just because they plan for something to go ahead doesn’t mean it’s going to go ahead.”
3. Seek gentrification
There’s nothing like a suburban makeover to get values soaring and if you can pick a location at the start of its journey, you’re sure to reap rewards.
On a government level, it might be a big spend by council to beautify a location, or moves to boost local, rundown commercial centres.
You might also come across changes to a town plan that promote a push away from an area’s tired past, with plenty of stimulus to create something new.
Koulizos is a big fan of gentrification in creating equity.
“Some of the metrics I look at are (growth in) median income… occupations – are the number of professionals increasing at a faster rate than the state or national average? – and is the number of university-qualified people moving in at a rate faster than the state or national average?
Also, is the percentage of government housing dropping faster in that area than the state or national average?
“Even if you look at the cars in the street. They’re often dotted with (a growing number of) small luxury cars.”
4. Lifestyle = value
Following on from gentrification, café culture is the big one to watch – one new cool brunch spot might be pioneering a position, but once you get a couple under way and residents from other suburbs start venturing down to enjoy their Sunday mornings, you’re probably on a winner.
Watch the hipsters in this respect – trendsetters trying new shopfront business in tired old areas.
The prime property is located within a five-minute walk of the cool café hub.
If tenants can avoid getting into the car to reach their favourite hot beverage outlet, you might find it’s a property worth backing.
It’s also worth checking out some of the ‘bridesmaid’ suburbs while you’re at it.
It’s those addresses that, while not actually within the coveted suburb’s boundaries, are close enough to take advantage of their facilities.
You get to pay a lot less for the holding, but still enjoy the benefits of close proximity.
5. Be coy on secondary positions
Sometimes buying affordably into a great suburb means compromising on position.
Perhaps you’re considering a main road frontage or allowing a train line to run along your rear boundary.
While for many investors this might present their only option, remember these sorts of secondary properties can sometimes be hard to sell in a soft market.
There’s an old valuers’ saying that you get the chance to sell a property in a secondary position about once every seven years, i.e. at the peak of the cycle.
Make sure you factor this into your investment horizon when taking the plunge.
Koulizos says he’s okay with main road property, but there are some secondary factors he’d be quick to avoid.
“Things I would stay away from would be 24-hour service stations, electricity sub stations, underneath heavy duty power lines and cemeteries.”
6. Worst house, best street, big profit
Following on from tip five, make sure position is paramount.
Looking for a dodgy holding in a great street provides plenty of upside potential.
If you know the neighbours are all selling for well above the local median price, and can see the fundamentals of the property look good, then here’s a great opportunity to make some money.
Small changes should yield big results for the right venture.
Slack-Smith says to pick the good street, simply check out the location online.
“This is as easy as going onto the internet and putting in the suburb you’ve chosen and going through the way that agents are marketing it.
If they say, ‘This is on the ‘right’ side of Parramatta Road’ or ‘this is in the golden triangle,’ for example.”
7. Look for a twist
It’s a tried and true approach to equity, according to Slack-Smith.
Find property with further potential so you can add your own equity to the equation.
Slack-Smith explains that while redevelopment holds appeal, there are dollars to be made in smart renovation if you know what to seek.
“Look at the pricing disparity between renovated and renovated property.
If renovated properties are selling for $400,000 and the unrenovated properties are selling for $350,000, there’s not a lot of equity you can make, but if the $350,000 properties are selling for $550,000 with some cosmetic renovations, there’s some disparity in there that allows you to create equity.”
Slack-Smith says checking the local plan comes in handy here, too.
“It might be upcoming zoning changes you’re aware of, it might be the granny flat, it might be the subdivision, it might be putting in an attic bedroom… there’s that twist creating an opportunity for equity growth.”
8. Look for eager vendors
Accelerate your equity on purchase – buy below the market.
While this can be viewed as taking advantage of others’ misfortune, it’s an opportunity to find instant equity.
In most cases, as well, the sellers need someone to buy the property fast for their own reasons.
“Everyone talks about the three ‘D’s, which are divorce, death and destitute.
For me there’s also disinterested.
I’ve picked up two properties from disinterested owners – overseas owners – that don’t really care about what’s happening in the market,” Slack-Smith says.
By looking for the right element, you can gain equity before the ink even dries on the contract.
This article first appeared in Australian Property Investor Magazine – Australia’s #1 Magazine for property investors and is republished with their permission.
See the original article here.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.