More and more Australians are seeing the benefits that investing in real estate can bring.
But without a reasonable idea of the most suitable properties to invest in, dreams of a secure financial future and early retirement through real estate may never materialise!
In my mind, there are two types of properties that could put investors in a compromising position in the current market.
Over the last few years our property markets have become very fragmented and clearly not all properties are investment grade.
In particular, both off-the-plan apartments and house and land packages raise warning flags to would-be investors.
While buying off-the-plan can be opportune when the market is in the correct phase, at the moment investors should exercise caution when considering these two types of properties, which happen to be among the worst performing sub calsses.
Property misfit #1: House and land packages
While houses in new estates in the outer suburbs may be great places for families to live, investors need to know what they’re getting themselves into.
Interestingly these “affordable” suburbs have a higher degree of mortgage stress than the more expensive inner suburbs because, in general, the local demographic is more mortgage dependent and interest rate sensitive.
As our markets are in the more mature stage of their cycles, especially in Melbourne and Sydney, some properties will suffer more than others when interest rates eventually rise.
And these properties will generally be located in outer suburbs which are more sensitive to interest rate increases.
One of the key factors many people consider when looking to rent or purchase a property is travel time; how long will it take to get from point A; their home, to point B; their place of work, where they shop, dine and go for entertainment and recreational pursuits.
And as our cities grow home buyers will place a premium on those suburbs closer to the CBD where the higher paying jobs are and where all the action is.
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And it’s the same all around the world.
Property misfit #2: Off-the-plan apartments
Large-scale, brand new apartments are becoming increasingly popular amongst investors.
So, it may be surprising to learn that they could turn out to be one of the worst performing properties of the current market!
The main issue with this boils down to supply and demand: there are so many apartments available and not enough renters to soak them all up.
Added to this, these types of properties are largely the same in many ways, giving you few opportunities to wow potential tenants with an ‘x factor’.
When an oversupply on your end and incredible amounts of competition combines, the result is not ideal for you, as it can serve to dampen the value of the property.
You’d be in an especially susceptible position if the market were to take a turn for the worse, because a large number of people would be trying to sell off the apartments at the same time as you.
You’d either find yourself forced to sell for a lower price, or not being able to sell at all!
In addition to the effects of the supply and demand curve, off-the-plan apartments tend to restrictive in size and lack the privacy that many tenants crave, and the result is that tenants don’t stay very long.
While it is advisable to focus on capital growth as opposed to a high rental yield, keep in mind that you may be looking at higher vacancy rates with this type of property.
What to do with this information?
While properties that are yet to be built can be fantastic investments under the right conditions, in the current market phase, they aren’t performing well.
It’s wise to become familiar with why these properties aren’t working, and then assess whether they’re the right decision for your portfolio right now.