How to tell whether a property is really investment grade

Property investors have access to more information than ever before, yet many still begin their search in the wrong place.

They scroll through listings, become attracted to a renovated kitchen or impressive photographs and then start looking for data that supports a decision they have emotionally made.

Successful property selection works in the opposite direction.

You need an evidence-based framework that gradually narrows the market from the right state and city to the right suburb, the right street and eventually the right individual property.

That was the focus of this week’s special edition of The Market Room.

Rather than delivering the usual market update, I invited viewers to submit properties for me to assess live. I then worked through the listings and explained which ones I would consider, which ones I would reject and the reasons behind each decision.

Some attractive properties received a quick “no”, while others deserved further investigation. In many cases, the deciding factors were details that are easy to overlook when you are captivated by professional photography and persuasive marketing copy.

Watch the replay of this week’s Market Room Show below to see how do I used this selection process on real properties.

And below the video, I have explained the frameworks I used behind my decisions.

Investment selection should begin with a strategy

Before assessing locations or properties, you need to understand what you are trying to achieve.

An investment property is simply an asset used to help you reach a financial goal. Its suitability depends on your income, borrowing capacity, existing portfolio, risk profile, investment timeframe and future cash flow requirements.

This means a property that is appropriate for one investor could be completely unsuitable for another.

Some investors need a high-growth residential asset to strengthen their portfolio, while others may be ready to introduce commercial property for additional income. An experienced investor may also have the financial capacity and risk tolerance to manufacture capital growth through renovation or development.

Your strategy determines what type of property you should consider and the compromises you can reasonably make.

Once the strategy is clear, the property search can begin.

Location does most of the heavy lifting

At Metropole, we believe that location is responsible for around 80% of a property’s long-term capital growth performance.

This does not mean every property in a great suburb will make a good investment, but it does mean that even an outstanding dwelling will struggle to overcome the limitations of a weak location.

We begin by considering the broader economic and property cycle, then identify capital cities and markets with the depth and diversity required to support long-term demand.

Historical performance is useful, although it must be interpreted correctly.

A location that has recently experienced a rapid surge in prices may appear attractive on a five-year chart. Extending the analysis over 15 or 20 years can reveal long periods of stagnation, volatility or even falling values.

Recent growth tells you what has happened. It doesn’t necessarily tell you what will happen next.

The objective is to identify the economic and demographic forces likely to sustain demand through several property cycles.

Follow the money

One of the most important indicators in choosing the location for your investment property is the financial capacity of the people who live in the area.

We favour locations where household incomes are high and rising faster than the state average. These residents usually have greater savings, stronger employment prospects and more ability to pay higher prices for desirable homes.

This creates a deeper and more resilient owner-occupier market.

Affluent owners can continue upgrading their homes, competing for scarce properties and paying premiums for lifestyle and convenience. Their purchasing power becomes particularly important during periods when borrowing costs rise, or economic conditions become more challenging.

This is also why gentrifying areas can offer strong opportunities.

As higher-income households move into a neighbourhood, they renovate homes and support better cafés, restaurants, shops and services.

These changes attract more people with similar financial capacity, creating a reinforcing cycle of improving amenity and stronger property demand.

Supply matters as much as demand

Fact is, population growth alone doesn’t guarantee capital growth.

Thousands of people can move into an area, but if developers can quickly produce thousands of similar properties, the additional demand may be absorbed by new supply.

At Metropole, we generally prefer established inner and middle ring suburbs where there is generally no vacant land, and new development is constrained. In these areas, buyers must compete for the relatively small number of properties that become available.

The physical scarcity of land is only one part of the equation. Investors must also consider the supply of comparable dwellings.

An apartment may be situated in a tightly held suburb, but if it is one of hundreds of near-identical apartments in the same development, buyers and tenants will have plenty of alternatives.

That competition restricts price growth and can make the property harder to sell during a softer market.

Look for locations people choose to live in

Investment grade locations usually provide residents with access to employment, public transport, schools, healthcare, shopping, parks and lifestyle amenities.

The concept of the 20-minute neighbourhood is useful here. People increasingly value being able to reach the things they need for everyday life within a short walk, drive, cycle or public transport journey.

Walkability has become particularly important. A suburb may appear close to shops or transport on a map, but a major road, steep terrain or unpleasant pedestrian environment can make those amenities far less accessible in practice.

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You also need to understand the immediate neighbourhood because there can be several property markets within the same suburb. A quiet residential street near a village shopping precinct may perform very differently from a property beside a railway line, on a busy through-road or next to an industrial precinct.

In other words, suburb level data is the beginning of the investigation rather than the end.

The property still needs to pass the remaining 20%

Once the location passes the test, attention turns to the individual property.

An investment grade property should appeal to a broad group of owner-occupiers. These buyers dominate Australia’s housing market and largely determine the prices of comparable properties.

This owner-occupier appeal gives the property a deeper resale market and supports its value through changing market conditions.

Floor plans are particularly important because they determine how comfortably people can live in the property.

Buyers generally value appropriately sized bedrooms, practical separation between living and sleeping zones, secure parking, useful outdoor space and sufficient room for dining and entertaining.

Internal access from a garage, storage and an additional powder room may appear to be minor features, but together they can materially improve the property’s liveability and future appeal.

When buying an apartment, villa or townhouse, the size and composition of a complex also matters.

A small boutique development usually provides greater scarcity and reduces the likelihood that several identical properties will compete for buyers or tenants at the same time.

By comparison, a large complex can create constant competition. If multiple owners decide to sell, your property may become interchangeable with every other listing in the building.

Some flaws should trigger a quick rejection

Property investors sometimes spend too much time trying to justify a potential property to purchase because they have already become emotionally attached to it.

On the other hand, an evidence-based framework makes it easier to reject unsuitable properties early and move on.

For example, a property located beside a busy road or railway line may experience noise, reduced privacy and weaker buyer demand. Even within a highly regarded suburb, these secondary locations usually trade at a discount and may continue underperforming the better-positioned properties nearby.

For apartments, insufficient internal space, poor natural light, impractical floor plans, a lack of secure parking and excessive numbers of similar dwellings are common warning signs.

Potential development sites require another layer of due diligence. Trees, easements, overhead powerlines, flood overlays, site access and planning restrictions can reduce the usable building envelope and fundamentally change the project’s viability.

These problems may be solvable, but the solution comes at a cost that must be identified before purchase.

Investment grade doesn’t mean visually perfect

I have found that some of the best performing investment properties are visually underwhelming.

An older property may have dated finishes while offering generous rooms, a practical floor plan, valuable land and an opportunity to manufacture capital growth through renovation.

On the other hand, a beautifully presented new dwelling may come with a premium price, limited land value and little capacity for the investor to add value.

This is why the glossy photographs on the internet should be one of the last things you examine.

Start with the strategy, location and street. Then assess the floor plan, land component, scarcity and owner-occupier appeal before considering the finishes.

Cosmetic problems can usually be corrected. On the other hand, a poor location, compromised building position or fundamentally flawed floor plan is much harder to change.

Yield is part of the assessment, but it shouldn’t drive it

A strong rental yield can improve an investor’s cash flow and holding capacity, but it does not automatically make a property investment grade.

Sometimes an unusually high yield reflects rapidly increasing rents before prices have caught up, which may indicate an opportunity. In other cases, the yield is compensation for higher risk, weaker demand or limited capital growth prospects.

Residential property is primarily a long-term growth asset. Cash flow helps you remain in the market long enough to benefit from compounding growth, while the quality of the asset largely determines how much wealth you ultimately create.

Investors therefore need to consider yield alongside growth potential, ongoing costs, vacancy risk, borrowing capacity and their financial buffers.

The real test is how the framework works in practice

It is relatively easy to agree with these principles in theory - applying them consistently when an attractive property appears on your screen is much more difficult.

That is why this week’s Market Room is worth watching.

In the video, I work through properties submitted by viewers and explain how the 80/20 framework changes the way each listing is assessed.

You will see why a promising suburb doesn’t guarantee a suitable property, why some apparent shortcomings are acceptable and why other compromises should lead to an immediate rejection.

Most importantly, the exercise demonstrates that successful property investment comes from following a repeatable process rather than relying on emotion, headlines or a selling agent’s opinion.

No property will be perfect, and every purchase involves some compromise. The skill lies in understanding which compromises will have little impact, and which ones may restrict the property’s performance for many years.

That judgement becomes much easier when you have a strategy, reliable research and a clearly defined selection framework.

Watch The Market Room property review

I'd encourage you to watch the full replay of this week's The Market Room episode to see the process in action and to test your own thinking against it.

And I run The Market Room live every Thursday at 12 noon AEST, so if you enjoy it, please subscribe so you can be notified about future shows.

If you'd like help applying this same evidence based process to your own situation, that's precisely what our team at Metropole does every day.

We build a personalised Strategic Property Plan around your goals, your timeframe and your risk profile, and then we help you find and hold investment grade assets that are built to compound over decades rather than just look good in a listing. Click here now and organise a chat with one of our wealth strategists.