Financial freedom. It’s the ultimate goal for so many of us, but unless you’re a turtleneck-wearing tech pioneer or a crypto trading wizard, achieving it can seem beyond your grasp.
Didn’t our parents (and their parents) always tell us that you couldn’t go wrong with good old bricks and mortar? Well, it turns out they were right. Sort of.
While it’s true that property value has consistently been increasing over the decades, don’t be fooled into thinking that any property will be a good investment. It’s not the case. And if your goal is to have a wealth-creating property portfolio then you need to understand why.
A property buyers agent in Melbourne will tell you that any property can be investment STOCK, just move the owner out, put in a tenant and it’s an investment, but that doesn’t make it “investment GRADE”.
So, What Makes An Investment Grade Property?
Property investing is a game of finance, not bricks and mortar, so firstly it’s important to understand the ways that property investors make money:
- Capital growth — how much the property appreciates in value over time
- Forced growth — the capital growth you achieve by adding value through renovations or development
- Rental returns — the cash flow you get from your tenant
- Tax benefits — negative gearing or depreciation allowances, for example.
Understanding these key principles will help you recognise investment-grade properties when they become available. And similarly, which properties to avoid when looking to expand your portfolio.
For example, newly constructed off-the-plan high rise apartment complexes can be a common trap for inexperienced investors. They lure buyers in with their shiny, sleek surfaces but rarely meet the criteria for an investment-grade property.
They have little owner-occupier appeal, they lack scarcity, are usually bought at a premium and therefore have little scope to add value.
Savvy Investors Should Focus On Buying What Owner-Occupiers Are Looking For
Owner-occupiers make up approximately 67% of the housing market. They tend to purchase with their hearts over their heads, which typically results in paying more than market value and thus driving the property prices in that area up.
It’s why areas like Sydney’s eastern suburbs have become some of the most expensive locations in the world to buy. $2 million dollars for a studio apartment would seem absurd anywhere on the planet, but if your studio has views of an iconic beach and is only a 3-minute walk to the heart of uber-trendy Bondi, then the perceived value for an owner-occupier will justify the price.
5 Things To Look For When Buying Investment-Grade Properties
- Consider properties that appeal to owner-occupiers. Not because you intend on selling your investment, but because owner-occupiers will buy similar properties in the area pushing up local real estate values.
- Look to buy property below its intrinsic value, avoiding new and off-the-plan properties which come at a premium price and leave no room for forced growth.
- Look for a property that has unique, special or desirable features. You’re looking for properties that are scarce in the market, not a dime a dozen.
- Aim to buy property where you can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver capital growth. Not only will you increase capital value, but most likely the rental yield as well.
- Buy in a location that has a history of strong capital growth. This will be an area where owner-occupiers want to live and will pay a premium to achieve that.
Location Is Everything (Almost)
Desirable high growth areas will have access to key “lifestyle drivers” such as cafes, shops, restaurants, parks and schools. As our population grows, our roads become more congested and people will want to reduce commuting time, so proximity to public transport is also a major factor.
When assessing the potential value of a location, consider:
Highly developed urban areas with not much room for growth (think inner Melbourne) will usually fetch higher prices than their rural counterparts.
Again, think like an owner-occupier. Are there desirable lifestyle drivers in the neighbourhood that make it stand out from the surrounding suburbs?
Be aware of what has already been developed in the area but also future developments. Proximity to hospitals, schools and civic infrastructure makes a huge difference to property prices.
You may have found the perfect house in a perfect neighbourhood for a great price but if the lot is situated on a busy street, or next to a commercial property such as a shopping centre or petrol station then this can dramatically decrease its appeal.
Size does matter
Houses are depreciating assets. Land is what holds the true value. A shabby house on a huge block of land is almost always a better investment than a pristine house on a tiny block.
Use this guide to recognise investment-grade properties when they come to market and you’ll be in a great position to start or expand your property portfolio.