The difference between a good property and a bad property can mean up to hundreds of thousands of dollars over the investment horizon of twenty years.
Not all properties perform the same. Some investment properties only perform 1, 2 per cent compound growth per year, but there are properties that can perform 8, 9, 10 per cent capital growth per annum. This difference can account for hundreds of thousands of dollars over a twenty year period.
Property selection tip #1 — Never speculate
When buying investment property, there is no reason to speculate. Don't risk a guess. Base your decision to buy on the facts. Research the available sales evidence and do your homework on the local area.
Don't buy on the assumption that there's going to be a new freeway or a new hospital or a new school built. Invariably those plans either don't proceed or they get watered down.
Always investigate performance history. If a property hasn't performed in the past, it's unlikely to perform in the future.
Property selection tip #2 — Value land
The value of land is critical in any investment decision. We must remember that it is land that appreciates and buildings depreciate, so it's vital that we select properties that have incredibly high land value, in the range of $2,000 per square metre up to $6,000 per square metre.
Given it's the building that depreciates, it's important that the land to building ratio is higher. I always advise my clients that the proportion of land to building component should be 70 per cent land, 30 per cent building. Unfortunately, in many newer developments that ratio is the other way around — you're buying 10–15 per cent land with the remainder buildings.
Property selection tip #3 — Avoid main roads
Avoiding main roads is critical. That's because properties on main roads can suffer from significant traffic congestion, impeding access, and noise disruption. These factors can all impede a property's investment performance.
The best investment properties are generally found in quiet streets, in cul-de-sacs, within walking distance to schools, shops and transport hubs.
Property selection tip #4 — Buying off-the-plan
There are some inherent risks when buying off-the-plan, so it's really important that if you're choosing to go down this path, to do your homework.
When you buy off-the-plan, you are paying, in many cases, a premium value for that property, and if you have to sell that property in the short to medium term, it is unlikely that you're going to recoup all of your costs.
When buying off-the-plan, it's important to realise what you're actually buying. You're buying a package sale, which comprises a land component, a building cost component, a developer's profit and risk margin, and all of the marketing costs. Essentially this creates a premium value, so if you have to sell that property again in the short term, it's unlikely that you will recoup that investment.
The other risk from an investor's point of view when buying off-the-plan is: what will that market be like in 18 months to two years, when the off-the-plan development is complete? Is that market going to be over-supplied? Will it be in balance? Will it be under-supplied? Once again, you're speculating when you're buying off-the-plan.
Property selection tip #5 — Buy for capital growth
Investors need to be wary of financial incentives when buying investment property, such as stamp duty savings, rental guarantees and other giveaways. High rental return often disguises poor capital growth.
The majority of property wealth is created by capital gain. A property with a good capital growth profile and moderate rental return will always outperform a property with higher rental return. A property must perform on its own, without all of the financial incentives and bells and whistles.
By following these sound investment tips, you'll be able to make better financial decisions when buying property.
