|Location, location, location—a golden rule in property investment that helps investors ensure long-term growth for their assets, but how can they determine where NOT to invest?
Location stands as one of the most crucial considerations for investors before buying a property as it determines the level and quality of supply and demand as well as the potential return on investment. Moreover, location is a critical element you can’t change about a property, thus making it one of the most important purchasing decisions to be made.
In fact, some experts go as far as saying that property investment success based on price growth is 80 per cent location and 20 per cent property.
Of course, Prospa Property Advisory focuses heavily on the right location and the right property type for our clients.
Investors are encouraged to start their research from the state-level, followed by suburb, street and down to property. Then, conduct due diligence by engaging professionals to review all legal documents and conduct building inspections prior to handover. It is also essential to consider a Depreciation Schedule if you are buying a brand new property – your accountant will guide you more on this.
Ultimately, the aim is to achieve significant growth over a period of time without overcapitalising.
At Prospa Property Advisory we have a fairly strict formula for property selection. Here are seven characteristics of an area that we generally avoid when recommending an investment property to a client:
1. Areas with a Large Existing Rental Pool
An area where 50 per cent or more of the properties are rental properties could spell risk for investors. Generally, renters do not look after their properties as well as owner occupiers so the streetscape can diminish.
You are also competing against other landlords for the same pool of renters which can lead to rent prices dropping or having to offer other benefits to attract tenants to your property.
Finally, when you go to sell, this can be less attractive to owner occupiers wanting to live in the area.
In line with this, investors are also advised to watch out for increasing vacancy rates, which could be a good indicator of an imbalance of supply and demand—another negative influence on the value of properties.
2. Lack of Population Growth
Ultimately, the decline of population could lead to a decline of demand for dwellings, which could in turn, affect the capital growth of investment properties. The ideal investment location is one that can sustain high demand for properties. At the end of the day, higher demand plus limited supply generally results in higher rents and increased property values.
At Prospa Property Advisory we ensure that there are at least 100,000 people residing within a 20 kilometre-radius of the property before recommending it for investment. This provides a solid pool of potential tenants – as well as potential buyers should you need to sell the property in the future.
Investors are advised to consider the demographics of the area to ensure that they capture a large portion of the market for a long period of time. If the suburb is set to gentrify soon, consider how the changes could affect the demographic and, ultimately, the demand for dwellings.
3. Single Industry Towns
Single industry employment locations, like mining or Defence towns are often touted by spruikers as the next ‘hotspot’ but should be approached with extreme caution by property investors. They can sometimes offer very attractive rent yields and potential for short-term capital growth but can easily lead to heartache for property investors.
If the industry suddenly closes there is generally very little demand for rental properties which sees rental prices drop considerably, along with overall property prices. The recent Australian ‘over before it began’ mining boom scalped a lot of unsuspecting investors who were trapped in negative equity positions (i.e. their investment loan was higher than the property value) after mines closed.
With multiple industries supporting the local economy, investors are less exposed to the risk of a sudden change in the property market, which could then significantly affect the growth of their portfolio. Multiple industries also often support consistent job growth, which strengthens the demand for property in the area.
When looking for a good investment location, Prospa Property Advisory recommends reviewing the overall employment market—the number of jobs, the median salary, the types of jobs and the trends.
4. Mainstream Hotspots
Hotspots are defined as booming property markets, but investors often misinterpret just how the boom affects their assets. While buying in an area on the verge of a boom can often result in substantial profit, buying as a result of the ‘herd mentality’ can lead to significant loss.
The key, according to experts, is to identify a growth area before it is dubbed a ‘hotspot’ by the mainstream media. Often, these areas are home to several indicators of capital growth such as new infrastructure, population and jobs growth.
Investing in a growth area before it takes off and ultimately becomes a hotspot allows investors to get into the market at an affordable price and consequently enjoy substantial growth over a short period of time.
5. Localised Issues
While a particular suburb may be considered perfect for investment, there are micro-factors which can affect the property itself. A property close to transport, employment zones and other significant infrastructure/amenities often experience an appreciation in value. However, being too close to high-traffic areas, high-noise or polluting industry could have a negative impact.
High voltage power lines could not only impact on your tenant’s health but they will certainly impact the view your lender has on the property – and you capacity to secure a loan.
While it is not always necessary to have visited the site yourself it is important to have these factors reviewed. Prospa Property Advisory does not recommend a property to our clients unless a member of our team has conducted due diligence on the actual location.
6. Bad Neighbourhoods
In the same way that localised issues affect the desirability of a property, neighbours also influence the demand for a certain house. Often, having streets full of neighbours who exhibit bad behaviour bring down the marketability of a rental property, thus making it harder to maintain tenancy.
Apart from undesirable neighbours, crime rates can also affect the demand for a property, so investors are advised to look into local police reports or talk to local agents to ensure safety.
7. Poor Neighbourhood Aesthetics
Finally, investors are reminded that they are not just buying a property but more importantly, they are buying into a neighbourhood.
A nice neighbourhood devoid of noise pollution, crime and undesirable neighbours, highlighted instead by beautiful streetscapes and a healthy community, ensures consistent dwelling demand and therefore increases the chances of property values increasing over time.