Every property that sprinkles the vast expanse of our country has investment potential – be it good, bad or downright ugly. To be successful as a real estate investor, you need to create a strategy that is tailored to your individual situation and that can turn your real savings into growing equity or long-term cash flow.
Although there are many different ways to create wealth through property, no one likes to sign an agreement just to find out the path that made them back down financially. So with such a wide range of locations to go – all of which have a point of difference – how can you best find a property that will maximize your return on investment while keeping some of the potential risks under control?
Beyond the hustle and bustle of the city
When it comes to buying their first investment property, many people turn to their own backyard first.
“The majority of real estate investors have an unhealthy bias towards their hometown or a place that is desirable to them. And when it comes to research, they are absorbed by the features and benefits of the community and the bricks and mortar of the property. None of this is very relevant; it's subjective, "says Simon Pressley, general manager and head of real estate market research at Propertyology.
"There are a total of 185 individual cities that have a population of 10,000 or more, and that's a lot of choice. For 111 of them, the average price of homes has tripled in the past 20 years, and there are many, many regions that have done much better than many, many capitals. "
In fact, when Propertyology compared the 20-year performance of Sydney and the regional city of Launceston, it was Launceston that showed the highest average annual capital growth.
"Sometimes a property seems to offer a huge positive cash flow but requires a huge amount of maintenance … it's a big mistake that people make ; they focus on gross return, not net return "
Drew Evans, director of Caifu Property, points out that with the slowdown in the Sydney and Melbourne markets, regional markets have posted higher rental yields and "large amounts of capital growth".
"You can still get into where [properties] are relatively affordable with a decent rental return," he says.
Crunch the dollar figures
When you focus on a location that offers a high rental yield, it is important to take a step back and consider the real cash gains that an investment property will make in the long term. "Most people look for percentage returns, not necessarily dollars," says Evans.
"Sometimes a property appears to offer huge positive cash flows, but requires a huge amount of maintenance, has a huge amount of wear and tear; there could be high municipal rates, huge insurance. So, to me, it's a big mistake that people make; they focus on gross yield. not a net return. »
Evans opened a profitable path in residential development, with a strategy to generate significant capital gains and equity rather than rental returns.
"For me, this is where real wealth is generated," he says.
"So when you talk about getting faster return, it's by looking at existing comparable properties [in a certain location] by comparing similar real estate and reversing the engineering of the numbers for see if, if you were to develop a similar property, you would have instant equity at the end. »
Pressley adds that if circumstances change or if capital growth does not meet expectations, a good rental income can provide security.
"If capital growth must be everyone's primary objective, rental yield must also be respected. Cash flow keeps you in the game, ”he says.
Refine your search
By examining the many locations across the country to identify a suitable place to invest, Pressley begins by placing all of the options on the table.
"With 10 million homes, eight states and territories, eight capitals, and 177 other non-capitals that have an individual population of 10,000 or more, I'm gradually narrowing the search engine," said Pressley of his strategy. "
My first elimination process is to ignore any town or city that has been operating strongly for 12 months or more. History has taught us that growth cycles usually only last two to three years and only happen once every 10 to 15 years. »
Pressley then gives priority to places with various savings.
"Keep in mind that many large regional sites have economic diversity," he says. "There are about 50 in total, but examples include Albany, Albury, Armidale, Ballarat, Bendigo, Bunbury, Cairns, Dubbo, Geraldton, Hervey Bay, Launceston, Mildura, Orange, Shepparton, Toowoomba, Townsville and Wagga Wagga. "
A carefully selected shortlist is made even more compact, as Pressley then eliminates locations with excess housing supply or "a pipeline with higher than normal construction approval volumes".
Know what arouses interest
Each location that has met Pressley's selection criteria thus far is then surveyed to find out how its economy can further encourage interest.
"Job creation is the main driver of housing demand. Each year we identify the industry sectors that seem to have the best potential for expansion, "says Pressley.
"Job creation is the main driver of housing demand. Each year we identify the industrial sectors that seem to have the best potential for expansion "
"In recent years, this included tourism, certain specific agricultural products, food-related manufacturing, defense equipment manufacturing, international students and health care. We focus on cities and villages that have some of these industries in their own economic profile. "
Buying in a location that has an expanding local commercial hub is also helpful, and when the time comes to select the property, Pressley says that "the selection of individual assets includes the selection buying near a major employment hub. "
"We are focusing on creating jobs for the demand for housing, we are mitigating any potential excess supply and we are further reducing risks by emphasizing economic diversity," he said.
Monitoring growth in the surrounding regions
If a location is already experiencing a value boom and it is too late to enter the market at a comfortable price, then it is worth keeping a record of the "effect" ;training".
"Natural gentrification or urbanization has this ripple effect. What is happening is that the closer you get to the city, or the closer to a particular area or suburb, the more unaffordable it becomes, and naturally people get this sprawl , and that's what drives growth, "says Evans.
But with speculation still at stake here, what best indicates that a location will recur?
“These are the population movements in the region. Huge sums of money go into infrastructure, public and private, "says Evans. "There is a lot of job creation nearby, it's a good neighborhood to live in, so there are a lot of existing or planned amenities, and it's also more affordable than the neighboring suburbs.
There is a lot to be said for a strategy that puts more power in the hands of an investor, he adds, and knowing how to add value to a property can increase your chances of return. higher, whether you choose to keep it for rent after the renovation or for sale.
"It's about being able to take control of your own capital creation instead of buying something and hoping it will increase in the long run," says Evans.
"You have to be sure that this is specific to the demographics that move there. This is really important, because ultimately you want it to increase your returns from a performance perspective – and you would also like to increase your returns from a capital growth perspective. "
It is just as fundamental to know your final objective before starting a project, because this can help you avoid the risk of overcapitalization.
"There is a different psychology in being a homeowner who takes pride in his home and who takes care of things, and someone who rents property," says Evans.
"Focus on things that give you a return on your investment, rather than getting too emotional and spending on things that you personally want."
