Is it easy? No.

It is crucial to have a plan, after all, the stakes are very high. You owe it to yourself to have a strategy and it should include measures, a ranking system and other investment criteria which will shape your final decision.

There are several factors you need to consider including your personal tastes and, potentially, the future requirements of you and your family. Many clients who engage us to purchase an investment have an underlying desire to buy a property that could suit their children or indeed themselves. There are others who do not want to step out of their comfort zone e.g. I am sure it is an excellent investment but I dont really know the area or have personal likes and dislikes for certain kinds of properties such as Even though it is an investment I hate weather board houses or it needs too much work.

Now that we understand what your preferences are let us implement a proven strategy to ensure you buy the right investment. Here are my must haves:

CAPITAL GROWTH

Capital growth is closely linked to government spending. Since federation, governments irrespective of their political bias have invested heavily in capital works programs designed to improve the infrastructure and amenity of the City ( CBD ) which in turn has attracted private sector investment. The better the infrastructure & amenity are, the greater the demand is to live there or close by which explains why land values in some locations rise faster than in others.

So, what is infrastructure ? Transport, schools, hospitals, roads, shipping, airways, public housing, water, electricity & gas etc and amenity ? Parks, gardens, shopping centers, natural attractions such as rivers, bays, mountains, private schools, commercial outlets, sport stadiums and so on.

SCARCITY

According to The Macquarie Dictionary, scarcity means insufficient for the demand, not abundant.

There are 3 components to scarcity, the most obvious is location. Properties closer to the CBD are far more sought after and hence, scarcer than properties in the outersuburbs where supply is virtually unlimited.

The second component relates to improvements. Well maintained older style properties built before 1970 are in strong demand because they cannot be replaced. If that is true, then why are houses demolished? The answer is if the property is not carefully maintained & improved to meet the forever changing demographic needs of buyers, then there will come a time where it is cheaper to build a new house than renovate the existing one.

The third component is density. This particularly applies to multi unit / Hi rise developments and to a lesser extent, new housing of which there is an abundance. The greater the density is, the lower capital growth. The exception is property situated in unique or highly desirable locations.

POTENTIAL

Many of the clients we act for are not interested in making improvements. For others, identifying a property that has some potential can be most rewarding. The key is the outlay. It could be as simple as converting a laundry in to a study, installing sky lights in a dark hallway, removing a non load bearing wall to create more space or just removing old wall paper and re-painting. It all adds value and even if you decide not to do the work it is something that you can potentially on sell in the future.

YIELDS

Given that most residential investments we purchase are for both wealth creation ( growth ) and tax relief or negative gearing, it is a matter of finding the right balance. Generally, properties that offer high yields are more susceptible to extended periods of vacancy and are less likely to appreciate as quickly as properties with lower yields. For example, properties to be wary of are fully furnished properties which have great yields but are often vacant for long stretches of time because the demand for furnished accommodation is limited. On the other hand, if you are looking for a positively geared investment, then the yield takes on far more significance and it maybe, that you should consider purchasing a commercial / retail property which will give you a much better return. The only problem is if you do adhere to the guidelines I have suggested , you will require a lot more capital. As a general rule, the relationship between yield and capital gain is inversely proportional, the higher the yield the lower the capital gains.

Whilst this check list is by no means exhaustive, it highlights what should be front of mind when buying an investment. Easy, isnt it ?

 

Rob Millar
Domain Property Advocates
June 2010