March 10, 2014
Yew Kong Lye
Buying an investment property can be richly rewarding or it could be a nightmare. The good news is, the choice is yours. Education, preparation and planned execution will greatly enhance your chance of success and greatly minimise the chance of it turning into a nightmare.
Before we discuss location, it is critical that you know the reason for buying the investment property because it will determine broadly where you will locate the property. Do not jump into your car and go on any property inspection until you know that reason. There are 4 main reasons why a person invests in real estate. They are to create the following outcomes: ·
- To maximise capital growth ·
- To create an income stream ·
- To value add to the property-renovate or develop ·
- To create a tax refund situation-negative gearing
It is the purpose of this article to concentrate on the reason of maximising capital growth as the reason for property investment. It is an important consideration because if there’s no capital growth, there will be no wealth creation and no comfortable retirement.
As such, location is of paramount importance. Here we will discuss, in two separate articles, how to maximise the capital growth of your investment property and it boils down to:
- The macro and micro drivers of property prices, and
- The timing of the purchase to maximise capital growth potential.
THE KEY MACRO AND MICRO DRIVERS FOR PROPERTY GROWTH
When someone is looking to purchase a property, the general wisdom has always been to locate it near transport, schools and shopping. However, it’s much more scientific than that if you want to give it the best chance of growing better than average over time.
There are lots of factors that determine capital growth and professional property researchers have full time departments looking into all the factors that affect property growth. Some even have their research methodology audited and endorsed by key industry authority. Such methodology based on sound selection criteria has proven to pick winners over a long period of time in the Australian property market.
THE MACRO DRIVERS THAT AFFECT PROPERTY GROWTH ARE: ·
Economic Growth and Employment
How the economy in the location considered is fairing? Is there growth? Will the area create more jobs? What is the long term prospects? Etc, etc. ·
Population and Demographic Changes
Is there population growth in the area? Are people moving into or out of the area? Is there income growth? What is the demographic profile of the area? Etc, etc. ·
Infrastructure and Government Spending
The main reason why this affects property growth is because such spending has a multiplier effect on the economy of the area. It will attract more people and create more jobs. The level of infrastructural and Government spending has a great impact on property growth and is a key factor you wouldn’t want to ignore. Following infrastructural and Government spending is like following your nose to a banquet-very good chance of a treat. ·
Supply and Demand
According to economics 101, when demand exceeds supply, prices will go up. Same applies for property. When more people want to live in an area for whatever reasons (e.g. jobs, amenities, transport, lifestyle), relative to the availability of dwellings, prices will go up. A highly dependable indicator is when property prices in the location is flat for a long time and the rental yields is progressively increasing. There will be an excellent chances that property prices will be on its way up shortly.
THE MICRO DRIVERS THAT AFFECT PROPERTY GROWTH ARE:
There is value in the property concerned when comparisons are made with similar properties in relation to location, quality of build, design, amenities, etc. and it's cheaper. This would be like picking an undervalued stock in the equities market.
Once upon a time if a property is near a train station it would be worth less. But how times have changed. Now the reverse is true and the main reason is that more people are using public transport to get to work and want to be able to get to the station easily, preferably within walking distance. An area with good rail and road infrastruture will always do well in growth potential.
A well spec home with quality fittings will keep it value well and tend to attract more interests. "A Rolls Royce never breaks down, it only fails to proceed" That statement is so subtle in promoting the brand as well as emphasising the qualty of the product. So, does your investment property breakdown or fail to proceed?
It needs to be modern and cater for contemporary needs. The alfresco area is an example of how lifestyle and its associated needs have changed over time. Renovation and property programs on T.V have created interest and awareness and in a way have dictated design and taste.
Here, you need to be conscious of changing lifestyle trends. A suburb gets gentrified when the café latte set moves in. You will notice more cafés and restaurants opening in the area. That is just one example of changing lifestyle. Another is the availability of child care centres as both parents go to work to maintain a certain lifestyle. Such amenities and others like entertainment, shopping, sporting facilities, etc determine how liveable an area is and directly impact on the median house value in the area.
If an area can command better than average rent, it suggests that it is a desirable area that people want to live in for all or most of the above reasons. This means that demand is strong and vacancy rate will drop. When this happens, property prices will start to climb. As suggested earlier, look for areas where rental yields have been steadily climbing relative to the property prices and it’s a good indication of potential, at the very least.
Next week I will discuss the timing of your purchase to maximise capital growth potential. There will be some interesting concepts to explore. Be sure to tune in for the next instalment. To find out whether to locate well is the $64m question, call 0413 871 888