If you had $1 million to spend, where would you invest in property in Australia today?
Where, what location and what would you buy, and why?
And where is the best place to buy an investment property if you only had $500,000 to invest?
And by the way...is real estate still a good investment in Australia, considering the spectacular growth we've experienced over the last year or so?
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.
You know... that special location that will outperform the averages and the right property in that location that will be the stepping stone to a substantial property empire.
But I’m afraid my response disappointed the journalist because I didn’t answer his questions.
Now I wasn’t surprised by the request – I have found the most property investors start their journey by trying to choose a top location (because they think that's the best place to buy an investment property) or find a property that will make a great investment.
However, when you look at the results that most investors achieve by asking these types of questions, it makes little sense to invest the way they do or ask the questions they are asking.
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.
Buying property as an investment
You see…property investing is a process, not an event.
Things have to be done in the right order – and selecting the property comes right at the end of the process.
The property you will eventually buy will be the result of a sequence of questions you will need to ask and answer and a series of decisions you’ll need to make before you even start looking at locations.
Long before we talk about a property or the right location with our clients at Metropole, we look at factors including their age, their timeframes, and the desired end results in other words, what do they really want the properties to do – are they looking for cash flow, capital growth, or a combination of both.
And that’s because what makes a great investment property for you me is not likely to be the same as what would suit your investment needs.
So it all starts with helping our clients formulate a Strategic Property Plan which takes into account their surplus cash flow position, their risk profile (for example would they consider undertaking renovations or small development), whether they currently own a home or are wanting to buy a new home or upgrade their existing home in the future, if they are going to earn more income in the future, or if they’re going to decrease their family income because they’re having a baby, how many other investment properties they own, where they are located and how they are performing plus 35 other considerations.
So my first recommendation to anyone asking where to invest is to sit with an independent property strategist to formulate their plan.
It’s just too difficult to do on your own and I’ve found most investors tend to be too emotionally involved to see their situation objectively.
The benefits of formulating such a plan include:
- It will help you define your financial goals.
- You’ll discover whether your goals are realistic, especially for your time frame.
- You’ll find out what you’ve done right and what you’ve done wrong along your financial journey so far and what you can do about it.
- You’ll be able to measure your progress towards your goals and whether your property portfolio is working for you, or if you’re working for it.
- Your plan will help you identify risks you hadn’t thought of.
By following a documented plan, the real benefit is that you’ll be able to grow your wealth through your property portfolio faster and more safely than the average investor, without making any more costly mistakes along the way.
Three important parts of your investment equation
When you invest in property there are really only three major levers you can pull:
- Your budget – and that is usually determined by the banks.
- Location and you can’t afford to compromise on that.
- The right property in that location.
And unless you have an unlimited budget, and that applies to very few of us, investors usually need to compromise on at least one of the above.
Is real estate still a good investment?
We’re in for a 2-tier property market moving forward
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 realise 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.
In these locations, the residents don't have more money in their pay packet to pay the higher prices the properties are now achieving.
More than that, Covid19 has adversely affected low-income earners to a greater extent than middle and high-income earners who are likely to recover their income back to pre-pandemic levels more quickly, while many have not been hit at all.
Also, high-rise apartment towers in our CBDs, which were already suffering from the adverse publicity of structural problems prior to Covid19, will now become the slums of the future as they are shunned by homeowners and investors.
And as we start to emerge from our Covid Cocoons there will be a flight to quality properties and an increased emphasis on livability.
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.
To many, livability will mean a combination of:
- Proximity – to things like parks, shops, amenities, and good schools
- Mobility – access to good public transport (even though this may be less important moving forward) or a good road system
- Access to jobs
What makes a worthwhile investment property?
This is very difficult to answer because it all depends upon you – what do you want out of your property investment?
It’s impossible to say this location is perfect for everyone.
If you have been following my blogs, podcast, or videos you’d know that I believe residential real estate is a high growth, relatively low yield investment and that’s why I would only be looking for locations that are likely to outperform the averages with regard to capital growth over the long term.
But I do recognize that most investors need sufficient cash flow to service their debt, so yield is an important factor to be taken into account when choosing a location.
When selecting a location, I would initially start by eliminating locations.
For example, I would not be investing in regional Australia or in the smaller capital cities.
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There’s no doubt that some better performing regional locations or certain suburbs in our small capital city will outperform the poorer performing suburbs of our three big capital cities.
But when I suggest you should only consider investing in Australia’s big three capital cities, I’m also saying that it’s important to be very selective in choosing suburbs in these cities – investment grade suburbs that are likely to outperform.
Rather than looking in the rear vision mirror at what has already happened, I look for leading indicators of what’s likely to happen in the future.
So I look for locations where there is going to be strong economic growth which will lead to wages growth and eventually population growth.
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.
Fact is, 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.
Over the years I’ve noticed that experienced investors find it easier to choose a location – they’re not as emotionally attached to locations, as they’ve learned from their mistakes.
On the other hand, many beginning investors want to invest close to where they live, in suburbs they’re familiar with, or where they’d like to holiday or eventually retire.
Obviously, these are emotional reasons to choose a location, rather than basing decisions on data.
So the first question to ask yourself is: “How far are you willing to invest from home?”
Clearly the further you are prepared to consider the better your potential returns because you’ll have the whole of Australia open to you but if you’re only prepared to invest in your own backyard, your choices will be much more limited.
While there are around 3,800 statistically reliable suburbs nationally, in my mind, very few of these make investment-grade suburbs; ones that will deliver wealth-producing rates of capital growth.
How to choose an investment property in Australia?
I recommend looking for an area that has a long, proven history of strong capital growth and is likely to continue to outperform the averages.
Now that’s very different from a “hot spot” or the next big thing many beginning investors chase.
And as you dig into the data you’ll find that not all land is created equal.
Some suburbs will be more popular than others, some areas will have more scarcity than others and over time some land will increase in value more than others.
And you’ll find top performance has a lot to do with the demographics in the area.
These suburbs tend to be those where a large number of owner-occupier's desire to live because of lifestyle choices of the offer.
I look for suburbs where wages (and therefore disposable income) are increasing above average.
These will either be:
1. 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.
In general, these locations are the established inner-ring suburbs of our capital cities or suburbs close to water.
Over the long term, this segment of the market outperforms the other sectors.
Of course, not everyone can afford to buy at this end of the market, so strategic investors often look to invest in…
2. Aspirational Locations
These are the upper-middle-class areas and gentrifying locations of our big cities.
These are the suburbs where many affluent millennials are aspiring to move as they enter the family formation stage of their lives.
When this wealthier demographic moves into a suburb and this translates to being an area where locals are able to and prepared to pay a premium price to live there, putting a financial floor under your investment property.
As you wander through these suburbs you’ll see a changing neighbourhood with new developments and infrastructure improving the quality of services for the residents as well as driving economic and jobs growth.
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.
What to look for when investing in property?
If Coronavirus taught us anything, it was the importance of living in the right type of property in the right neighbourhood.
In our new “Covid Normal” world, people will pay a premium for the ability to work, live and play within a 20-minute drive, bike ride or walk from home.
They will look for things such as shopping, business services, education, community facilities, recreational and sporting resources, and some jobs all within 20 minutes reach.
Residents of these neighbourhoods have now come to appreciate the ability to be out and about on the street socialising, supporting local businesses, being involved with local schools, enjoying local parks.
But it’s not only the location that’s important.
While I believe that 80% of your property's performance is related to its location, the other 20% or so is related to buying the right property in that location.
Even in the best suburbs, there are some properties I would avoid – they just don’t make good investments and others I would be keen to have in my portfolio.
In general, there are 3 types of property.
- Grade homes and “investment 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.
These are not just houses but also family-friendly apartments in great neighbourhoods.
- 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 when buyers and tenants are more choosey.
- C grade properties – these are to be avoided unless they’re in a great neighbourhood 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:
- I’m a big believer in buying property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which generally attract a premium price tag.
- I also look for properties with a high Land to Asset ratio - but remember apartments have an attributable land value underneath them.
- I love properties with a twist. Your investment must have something unique, or special, or different or scarce – some ‘X-factor’ that makes it stand out from its neighbours – in order to land on my shortlist.
- And for those who can afford it, I’d recommend buying a property where they can manufacture capital growth through renovations or redevelopment.
Rather than asking where should I invest or what sort of property should I buy, the questions you should be asking are:
- What do I want to achieve from my property portfolio?
- What do I need to do to get those results? And…
- Who do I need on my team to help me achieve the financial freedom I want with minimal risk?