Binnari’s top three tips to consider when investing in property
Looking to invest in property? If you’re at the beginning of your property investment journey, the sheer volume of things to consider as well as the concerns around possibly making the wrong decision, can feel quite daunting. The good news is that If you get the key fundamentals right, the rest should fall into place.
Here are the three key fundamentals to follow that should ensure you have success when investing in property.
Having a grasp of the distinct market cycles across the country will empower you to identify the optimal market for your property investment.
The way the property market works is that it is actually a collection of various sub-markets or micro-markets which all operate in their own unique market cycles. Each market will perform differently at different times, depending on a range of factors including affordability, migration trends and supply levels.
As an investor, you can be very selective about the market in which you invest and don’t have to be constrained by the local area that you live in. That means you can find a property in a favourable market cycle, where the growth prospects and/or rental yields are stronger than the area you live in. The idea is to strategically take advantage of market fluctuations to more effectively build wealth.
For example, if you invested in Sydney from 2004 to 2010, you would have experienced minimal growth as the market during that period remained stagnant. Conversely, if you had invested in Sydney in 2011, you would have enjoyed the advantages of a robust growth phase. To select the right property market, do your research to understand which markets are likely to stagnate versus which markets are heading for a growth phase.
Another example of markets moving in cycles is illustrated in the figure below. This figure shows Brisbane’s median house price as a percentage of Sydney’s. The gap between the two markets tends to expand and contract as each market goes through its respective cycle. When Sydney increases, Brisbane is stagnant and the gap widens. When Brisbane finds itself at half the price of Sydney (50%-52%) we tend to see its affordability drive higher volumes of interstate migration and property demand resulting in the gap reducing.
Type of property
A good strategy is to target locations and property types that attract a significant number of owner-occupiers, i.e local buyers who are purchasing their homes to live in. Owner-occupier grade properties will tend to be in higher demand from renters and potential buyers in the future thanks to favourable characteristics like larger land size, better natural light, superior-quality finishes, practical layouts, and generous dimensions.
Below is an example of two three-bedroom townhouse designs that will perform quite differently based on their owner occupier appeal as a result of their design, layout and functionality.
The design of this townhouse is less likely to appeal to owner occupiers for a few reasons:
- Kitchen is quite small for a townhome of 3 bedrooms
- Entry on the ground floor via the garage or bedroom.
- Master bedrooms split from other bedrooms not ideal for a young family or retiree/downsizer
- Internal living size of 102 sqm + 1 car garage
This townhouse design is far more favourable:
- The living and dining space is quite wide – maximising natural light.
- Large spacious kitchen with an island bench
- Bedrooms are quite large and all located on the same floor
- Internal living size of 160 sqm + 2 car garage
It’s important to do your research on what local owner-occupiers are looking for in a property. While things like high quality finishes and larger floor plans will tend to be desirable anywhere, there will also be unique preferences in each localised market, such as being located near certain streets to take advantage of more desirable school catchments. In this instance, if your local owner occupier community is predominantly families, it would make sense to be targeting a larger townhouse or home as an investor.
Supply and demand
One of the key fundamentals for property investment is the impact of supply and demand. When there is a low supply of a property type in an area with high demand for that property type, then property prices and rental returns will increase over time. When there is an oversupply and declining demand, property prices and rental returns tend to lag.
Regions characterised by a significant proportion of owner-occupiers are considerably less prone to experiencing price declines resulting from oversupply concerns. The most significant drops in property prices within vulnerable markets typically occur in oversupplied suburbs with properties primarily targeted at investors. Home owners are less likely to uproot their entire family when a market begins to cool, as they have their kids in local schools, plus family and friends close by. An investor, on the other hand, has no emotional connection to the area and is far more likely to put a property up for sale if the market and/or their personal circumstances tighten. As a result, this can lead to a greater level of supply and may result in reduced capital growth and rental returns.
It’s a good idea to conduct thorough research into vacancy rates, recent sales, average days on market and planning approvals to evaluate the existing supply and demand dynamics. When observing areas encountering low supply, it is essential to bear in mind this may change considerably if substantial new property supply has been approved for that area. For instance, regions with a substantial number of new high-density apartment complexes or newly developed suburbs with unlimited land supply can swiftly become oversupplied as natural demand lags behind, which can negatively affect property values.
The below is an example of Maroubra and Zetland in Sydney which have experienced vastly different levels of new property supply. As a result, both properties experienced a significant difference in capital growth achieved over an equivalent amount of time.
Maroubra versus Zetland
Address: 27/36 McKeon Street, Maroubra
Purchase Price: $875,000
Purchase Date: November 2009
Sale Price: $1,626,000
Sale Date: August 2018
Capital Growth: 85%
Projected New Apartments (2016-20): 585 units
Address: 503/4 Ascot Avenue, Zetland
Purchase Price: $670,000
Purchase Date: November 2009
Sale Price: $865,000
Sale Date: August 2018
Capital Growth: 29%
Projected New Apartments (2016-22): 5,571 units
What else should property investors consider?
If you are able to get a handle on market cycles, property types and supply and demand, then the rest will likely fall into place. However, that doesn’t mean there aren’t several other interrelated factors to consider when doing your due diligence:
- Population growth – As the population of an area increases, the demand for housing in that particular location rises. Monitoring both overseas and interstate migration is a crucial indicator when assessing the phase of a specific property market cycle. For instance, numerous areas in South East Queensland have experienced a significant influx of interstate migration, leading to market pressure in terms of rental availability and prices. Conversely, the absence of international students and the departure of people from Victoria during the pandemic have adversely impacted certain segments of the Melbourne property market, especially the inner-city apartment markets
- Rental yield: rental yield represents the rental income generated by a property as a percentage of its value. A lower rental yield implies greater potential expenses out of pocket for property maintenance and management. Conversely, a high rental yield frequently results in a property that breaks even or even generates positive cash flow.
- Rental demand: it won’t be beneficial to acquire a property solely based on its high rental yield if there will be challenges with finding tenants. Some areas that heavily depended on international students, for instance, might currently face a decline in rental demand.
- Infrastructure – Investment in local infrastructure such as hospitals, schools, airports or commercial precincts will often be followed by population growth and therefore aid future capital growth as a result of increasing demand
- Employment diversity – If an area doesn’t have strong and diverse job prospects and/or is experiencing high unemployment, then population growth, capital growth and rental demand are likely to suffer. If an area relies on one or two industries (such as mining towns) this is also risky in the event that that industry declines
- Liveability – Locations where people want to live with good schools, public transport links, shops, restaurants and cafes will tend to perform well. You should also consider the walkability of the area (how easy it is for people to walk to the shops or local employment)
- Seek professional assistance – To make sound property investment decisions, it is crucial to assemble the right team that can guide and assist you. This approach will help you steer clear of any traps that may result in you acquiring a less desirable and valuable investment property.
Looking to invest and want the experts on your team? Chat to us today to find the right property investment for you.