What’s ahead for our property markets?
Sure, our markets are still booming, but there seem to be more headwinds ahead. In light of that, in today’s show, I’m going to answer the question: where should you buy your next investment property?
And even if you’re not planning to buy soon, I think this episode will be informative for anyone who’s interested in property.
I’ll also share my mindset message about things I would have liked to know at the beginning of my investment journey.
Where, what location, and what would you buy, and why?
And by the way…is real estate still a good investment in Australia?
These questions were recently posed to me by journalists, and I can understand why – they are common questions investors are asking today and they make great headlines for articles.
Everyone would like to know how to find the best property investment locations or Australia’s best growth suburbs.
However, statistics show that around 50% of all property investors sell up in the first five years, and of those that stay in the market, 92% never get past their first or second investment property.
So, if you want to outperform the average investor, if you want to develop financial freedom through property investing, then don’t start by selecting a location, or looking for that ideal property.
Things must be done in the right order – and selecting the property comes right at the end of the process.
My first recommendation to anyone asking where to invest is to sit with an independent property strategist to formulate their plan.
The benefits of creating a plan with an expert include:
- It will help you define financial and investment goals.
- You’ll discover whether those goals are realistic.
- You’ll find out what you’ve done right and what you’ve done wrong along your financial journey.
- You’ll be able to measure your progress towards your goals.
- Your plan will help you identify risks.
Understand the three important parts of your investment equation:
- Your budget
- The right property
Be aware that investors usually need to compromise on at least one of the above.
So, what about that journalist’s question - “Is real estate still a good investment?
While most property markets around Australia have performed strongly so far this cycle (other than the inner city of high-rise apartment market), it’s important to realize that moving forward we are likely to have a 2-tier property market.
In other words, not all property markets will continue growing strongly moving forward.
Properties located in the inner and middle-ring suburbs, particularly in gentrifying locations, will outperform cheaper properties in the outer suburbs.
While the outer suburban and more affordable end of the markets have performed strongly so far, affordability is now becoming an issue as the locals have had minimum little wages growth of the time when property prices have boomed.
As their priorities change, some buyers will be willing to pay a little more for properties with “pandemic appeal” and a little more space and security, but it won’t be just the property itself that will need to meet these newly evolved needs – a livable location will play a big part too.
I would not be investing in regional Australia or in the smaller capital cities.
But more than that I look for an affluent demographic who will be able to and prepared to pay more to buy or rent in these suburbs.
I don’t like to fight the big trends.
Why fight with the gorilla?
Other important drivers of capital growth include supply and demand, infrastructure, livability, and amenity.
I look for suburbs where wages (and therefore disposable income) are increasing above average.
These will either be:
- Discretionary Locations
These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.
- Aspirational Locations
These are the upper-middle-class areas and gentrifying locations of our big cities.
On the other hand, I would avoid investing in the more affordable locations as this end of the property market underperforms over the long term with regards to capital growth and rental growth because many of the owners are young families who have stretched themselves to their financial limits and are often only a week or two weeks away from broke.
People will pay a premium to be in the right neighborhood
What about choosing a property in your preferred location?
In general, there are 3 types of property.
- A grade properties are the type of assets you want to own, and the type of properties where great tenants want to live, not because they need to, but because they want to and are prepared to pay extra to live there.
- B grade properties still have a lot going for them, and during hot property markets like we are currently experiencing they still perform well, but their second location within their suburb or the less than perfect attributes of these properties mean they will slump more in downtimes.
- C grade properties – these are to be avoided unless they’re in a great neighborhood and your intention is to demolish the property and replace it with something more appropriate for the location.
Here are some of the factors to look for when selecting an investment-grade property:
- Buying below the property’s intrinsic value
- A high land to asset ratio
- A property with a twist
- A property where you can manufacture capital growth through renovations or redevelopment.
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Some of our favourite quotes from the show:
“You see, property investing is a process, not an event.” – Michael Yardney
“When selecting a location, I would initially start by eliminating locations.” – Michael Yardney
“You shouldn’t be doing what everyone else does, because otherwise, you’ll get the same results they do.” – Michael Yardney
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