How to select property that outperforms the market
In good
times, it’s easy to become complacent when choosing an investment property. The
media’s full of hype, prices are skyrocketing, and people are in a scramble to
buy. It’s not unusual in times such as these to think that anything you touch
will turn to gold. But it’s not until things get a bit rocky that the market
really starts to sort out the wheat from the chaff. Properties that never had
the right fundamentals get hit hard, while the rest calmly weather the storm.
With the
market turning upwards once again, I’m sure many of you are contemplating
acquiring an investment property. If you are, learn from the mistakes many
others made in the last boom and purchase wisely. You must always remember that
not every property is the same. In fact, the potential for growth in each
property can vary quite dramatically.
Let me
explain. What would you say if I offered to write you a cheque in 10 years time
for $75,000, no strings attached? I’m sure you’d jump at it. Well, buying a
$500,000 property that experiences a 7% average annual growth compared to one
with a 6% average annual growth will result in around $75,000 of extra equity.
Even after only 5 years, the 1% difference will put about $25,000 extra into
your pocket. It’s a simple example but just goes to show property selection is
critical to maximising your wealth.
Selecting the
best possible property often comes down to a number of factors. In this article,
I’m going to focus on just one – supply.
Supply is just
one half of the equation, demand being the other. If demand for houses increases
faster than supply, then prices will go up. If demand decreases and plenty of
supply still remains, prices go down. And naturally, if they are about equal to
one another then prices will remain relatively stable. Not a bad thing, but not
a good thing either if you’re looking to build your wealth as fast as possible.
So if you’re looking to buy a well-performing investment, it makes sense to look
for something in an area with relatively limited supply.
Areas with
limited supply tend to be those that are well-established. If you buy a 3x1 in
an area that is 30-40 years old not too far from the CBD, you know that supply
of that type of property is unlikely to increase substantially as there is no
more land available to build on. Assuming people hold a desire to live in that
area and, better yet, you predict that desire to increase over years to come,
then you can be reasonably confident your property’s value will continue to
rise. But just buying in established areas close to the CBD is not necessarily
secure for every type of property. Consider a 2x1 apartment just a short stroll
from the CBD. If there is surrounding land ripe for development, or plenty of
old buildings ready to be demolished for brand new apartment complexes, supply
of apartments in that area could be plentiful. When researching an area, I find
it valuable to contact the council to find out what plans there are for the
area. Potential changes to zoning to allow more subdivision or demolishing of
large schools or hospitals to accommodate new estates in the area, may all
impact on your decision to buy whether for worse or for better.
Venturing out
further from the CBD often leads to areas that are relatively new and perhaps
starting or in the midst of development. Many are usually abundant in available
land, both in their own suburb and in future areas surrounding it. Whilst I
certainly believe there are some good buys in such areas (due to them possessing
other key fundamentals), they can be risky due to excess supply issues.
Often supply
needs to be considered in light of time. There may be enough land in the area to
develop for another 10 or even 15 years, and if there’s a real chance you may
sell in that timeframe, you may be caught fighting against a hundred other
similar homes on the market at the same time. With plenty of competition, it's
unlikely houses in the area will be achieving significant price growth. In this
scenario, you might find your money may have been better invested in another
area.
On the topic
of supply in outer fringe areas, there’s a phrase that I feel investors should
be a little cautious of and this is “growth corridor”. This seems to be the latest catch-cry of
a host of suburban fringe developments like the Beenleigh area in
But sometimes
supply is not always about what land or opportunities are around ready for
development. A character home from the early 1900’s in an area with plenty of
redevelopment going on, will still fare well. That is because character homes
themselves are always in limited supply – what stands today is all that will
ever be. No matter how much land is created in that area, you just cannot
duplicate the age and real features of a character home that are much
desired.
The concept of
supply and its impact on price growth is actually quite logical but it’s
something that many investors somehow seem to forget. Perhaps they get carried
away with the excitement of buying, are won over by the beautiful décor of a
place, or can’t resist a so-called “bargain”. This is why it’s so important when
buying an investment property, to think with your head and not with your heart.
Remember, if
you want to build real wealth it is absolutely crucial to buy property that
outperforms the market. And aside
from supply, there are numerous other factors that should be considered when
selecting a property. If you're in WA and want to find out what other
factors you should look out for, the type of properties you should buy, and
clever strategies for making money in any market, then why not attend our
upcoming seminar titled “How you can
find ‘Millionaire Maker’ investment properties”. We’ll be hosting one
seminar in
Momentum
Wealth and its affiliated entities are not Accountants or financial Planners.
While all information is provided in good faith, you should seek your own
independent advice in relation to all matters regarding investing, taxation and
superannuation.
