What makes an “investment grade” property?

There are close to 10 million dwellings in Australia and at any time there are around a quarter of a million properties for sale.

But not all properties make good investments! house yes no cross suitable help guide wrong right property house building good bad

In fact, in my mind less than 5% of the properties on the market currently are what I call “investment grade.”

You see…over the last few years as our property markets have slowed down, while there is no real shortage of properties on offer, there has been a real shortage of quality “investment grade” properties.

Of course, any property can become an investment property.

Just move the owner out, put in a tenant and it’s an investment, but that doesn’t make it “investment grade”.

To help you understand what I consider an investment grade property, let’s first look at the characteristics of a great investment, and then let’s see what type of properties fit these criteria.

What makes a good investment? Property-Investment-Checklist-300x199

The things I look for in any investment (including property) are:

  • strong, stable rates of capital appreciation;
  • steady cash flow;
  • liquidity – the ability to take my money out by either selling or borrowing against my investment;
  • easy management;
  • a hedge against inflation; and
  • good tax benefits.

So how do you make money from an investment?

Well…property investors make their money in four ways:

  1. Capital growth – as the property appreciates in value over time
  2. Rental returns – the cash flow you get from your tenant
  3. Accelerated or forced growth – this is capital growth you “manufacture” by adding value through renovations or development, and
  4. Tax benefits – things like negative gearing or depreciation allowances.

where to invest in property 2020 australia
In my mind capital growth is the most important factor of all, although not everyone agrees with me. 

But, let’s face it…statistics show that most property investors fail.

They never achieve the financial freedom they aspire to and this is, in part, due to the fact that they follow the wrong strategy – many chase cash flow.

Now don’t misunderstand me, cash flow is the ultimate aim goal.

But only once you’ve built a sufficiently large asset base of “investment grade” properties, meaning your investment journey will comprise three stages:

  1. The Accumulation Stage – when build your asset base (net worth) through capital growth of well-located properties. You can speed up your wealth accumulation through leverage, compounding, time and “manufacturing” capital growth through renovations or development. You then move on to the…
  2. Transition Stage – once you have a sufficiently large asset base you slowly lower your loan to value ratios so you can progress to the…
  3. Cash Flow Stage – when you can live off your property portfolio.

The safest way through this journey, which will obviously take a number of property cycles, is to ensure you only buy properties that will outperform the market averages with regards to capital growth.

To facilitate this, I use a 6 Stranded Strategic Approach.  

I would only buy a property:

  1. That would appeal to owner occupiers.
    Not that I plan to sell the property, but because owner occupiers will buy similar properties pushing up local real estate values.
    This will be particularly important in the future as the percentage of investors in the market is likely to diminishhouse plan
  2. Below intrinsic value – that’s why I’d avoid new and off-the-plan properties which come at a premium price.
  3. With a high land to asset ratio – that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
  4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area as mentioned above.
  5. With a twist – something unique, or special, different or scarce about the property, and finally;
  6. Where they can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.

Not all properties are “investment grade.”

O.K. back to my comment that less than 2% of properties on the market are investment grade.

Of course there is plenty of investment stock out there, but don’t confuse the two.

These properties are built specifically built for the investor market – think the many high rise new developments that are littering our cities – yet most of these are not “investment grade.”

They are what the property marketers and developers sell in bulk to naïve investors – usually off the plan, but they are not “investment grade” because they have little owner occupier appeal, they lack scarcity, they are usually bought at a premium and there is no opportunity to add value.

Off the plan apartments make terrible investments!

Analysis by BIS Oxford Economics reports that of the apartments sold off the plan during the past eight years:

  • Two out of three Melbourne apartments have made no price gains, or have lost money upon resale. And this is despite a record immigration and a significant property boom.
  • In Brisbane about half these apartments bought off the plan are selling at a loss, or at no profit.Buying Off The Plan2
  • In Sydney it is about one in four apartments bought since 2015 are selling at a loss, or at no profit.

In other words, more investors in off the plan high rise apartments have lost money than have made money.

And of course there are all those investors sitting on the apartments which are continuing to fall in value, but they haven’t crystallised their loss yet.

In 2018, 98,000 apartments were completed across the country and 65,000 in NSW alone, according to ABS figures and the situation is only likely to worsen considering the pipeline of projects still being completed.

According to the BIS research, resales of apartments within a three to five kilometre of central Sydney, Melbourne and Brisbane have realised consistently lower prices than established apartment resales.

On the other hand, investment grade properties:

  • Appeal to a wide range of affluent owner occupiers
  • Are in the right location. By this I don’t just mean the right suburb –one with multiple drivers of capital growth – but they’re a short walking distance to lifestyle amenities such as cafes,  location map house suburb area findshops, restaurants and parks. And they’re close to public transport – a factor that will become more important in the future as our population grows, our roads become more congested and people will want to reduce commuting time.
  • Have street appeal as well as a favourable aspect or good views.
  • Offer security – by being located in the right suburbs as well as having security features such as gates, intercoms and alarms.
  • Offer secure off street car parking.
  • Have the potential to add value through renovations.
  • Have a high land to asset ratio – this is different to a large amount of land. I’d rather own a sixth of a block of land under my apartment building in a good inner suburb, than a large block of land in regional Australia.

The bottom line is buying the right ‘investment grade’ property is all about following a proven blueprint that successful investors follow.

This increases your chance of better financial returns and reduce your risks of getting caught out as our property markets move into the next, less buoyant stage of the property cycle.

How do you know which step to take next?

MetropoleIf you’re looking at buying your next home or investment property here’s 4 ways we can help you:

Sure our property markets are improving, but correct property selection is even more important than ever, as only selected sectors of the market are likely to outperform.

Why not get the independent team of property strategists and buyers’ agents at Metropole to help level the playing field for you?

We help our clients grow, protect and pass on their wealth through a range of services including:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now! Click here to learn more
  2. Buyer’s agency – As Australia’s most trusted buyers’ agents we’ve been involved in over $3Billion worth of transactions creating wealth for our clients and we can do the same for you. Our on the ground teams in Melbourne, Sydney and Brisbane bring you years of experience and perspective – that’s something money just can’t buy. We’ll help you find your next home or an investment grade property.  Click here to learn how we can help you.
  3. Wealth Advisory – We can provide you with strategic tailored financial planning and wealth advice. Click here to learn more about we can help you.
  4. Property Management – Our stress free property management services help you maximise your property returns. Click here to find out why our clients enjoy a vacancy rate considerably below the market average, our tenants stay an average of 3 years and our properties lease 10 days faster than the market average.
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'What makes an “investment grade” property?' have 11 comments


    January 5, 2020 Hock

    Hi Michael,
    What about foreigner investors? They are limited to new build or off the plan developments. What other options are available for them?


      Michael Yardney

      January 5, 2020 Michael Yardney

      you’re right Hock – it’s much, much harder for foreign investors and most have done very poorly being sold secondary properties by marketers.

      However there are some boutique new apartment or townhouses that would work well – waht is your budget?



        January 13, 2020 Hock

        Happy to explore, if you have good recommendations.
        Await for your email.


          Michael Yardney

          January 13, 2020 Michael Yardney

          Hock. We have a few recommendations – but I still don’t know your budget? Are you seriously looking or just exploring?



    September 8, 2019 David

    What are your thoughts on fractional property investment? – eg through a company like brickx


      Michael Yardney

      September 9, 2019 Michael Yardney

      Stay clear – this is not an investment – the truth is not everyone can afford to be a property investor – in fact if everyone was there would be no need for them – think about it



    August 31, 2019 jake

    Im an owner occupier of a 2 bedroom unit in east Brisbane that I bought in 2006 for $276,000 and now its probably only worth about $350,000 (if I put in new carpets and re do the bathroom and kitchen etc… ) the Body corporate is the killer for me, in 2032 it will be about $1000/qtr, and I wont be able to afford this at all on my wage, what should I do?
    Should I sell the apartment NOW and look for a house further out where there is no BC fee, or should I try and slug it out for a few more yrs and hope my apartment goes up in value a lot more and than sell it?



      August 31, 2019 jake

      I worked out my body corporate fees will be $1160 in 2032 and $1900 aprox in 2038, now on my job I will definitely not be able to afford this, its $550/qtr now and im struggling, and whats worse is the value of my apartment has basically gone up only 27% in value over the past 13yrs, that’s basically 2% /yr, that’s a terrible return isn’t it, I was probably better off renting or still living at home until I was 40, together with the banks interest and extra repayment ive made, ive basically LOST money on my apartment over the yrs, so what should I do? just sell it now and buy a house but in a far away suburb, or should I slug it out and hope Brisbane booms like Sydney did in a few yrs and than sell my apartment? Its a boutique apartment in a block of 6 built by Italian builders with intercom and garage and its on a pretty big block only 3-4km from the CBD.


      Michael Yardney

      August 31, 2019 Michael Yardney

      Jake – clearly your apartment has under performed in the last 12 years so it may make sense to sell it – but the will be CGT and stamp duty involved and I don’t know your borrowing capacity – just too many variables to advise you.
      Why not get my team at Metropole to put all the figures together so you can make an informed decision – we call it a Strategic Portfolio Plan – c lick here and organise a time to have a chat



    March 5, 2017 Alex

    This is the philosopher’s stone of residential property investment.


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