Three common purchase mistakes that can hold back your property’s performance
In many ways, recovering markets can present some of the best opportunities for property investors. With rising rental competition, lower interest rates and the ability to purchase property at competitive prices, there are a lot of factors that can sit in a buyer’s favour.
However, it’s at this time of rising confidence that investors also need to be at their most astute, cautious and selective in their property selection. In markets that are near or entering recovery, not all properties grow at the same rate – and the cost of getting this purchase wrong can be more detrimental to your portfolio’s performance than you might think. So what are some of the buying mistakes you want to avoid?
Buying in oversupplied areas
Like the value of any goods and services, property prices are largely driven by supply and demand. Whilst many buyers will consider demand factors when choosing where to invest such as proximity to local amenities, schools and employment centres, a lot of investors will overlook the equally important impact of supply on property prices over time.
The supply of properties for sale can differ vastly across different areas of a property market. In every city, there are suburbs which are tightly held where buyers are regularly competing to secure properties. This regular buyer competition can place upwards pressure on property prices, leading to a steady growth in value over time. Conversely, there are other locations that regularly experience an influx in supply of properties, perhaps from apartment developments, new house and land packages, or even through the regular re-sale of existing stock. This consistent flow of supply means that owners are regularly competing with new stock when trying to sell, which can hold back the growth of established properties in the area. What’s more, in areas where developers are under pressure to sell more stock, they will often offer discounts and incentives on new properties, which will effectively discount the value of your property as well.
Investors who buy in these oversupplied locations could find themselves waiting years to realise capital growth rather than enjoying the steady rise in value they might experience in areas where supply is more restricted.
Overlooking land value
Another factor many buyers will overlook when purchasing property is the significance of land value on a property’s long-term potential. Newer properties can look appealing and they certainly hold potential for lower maintenance costs, but buying a newer property in the wrong area can also end up being costly when it comes to capital growth. This is because it’s the underlying land that’s the appreciating asset.
“Land appreciates, buildings depreciate” is one of the fundamental principles of property investment, yet it’s also one of the most overlooked. While properties slowly depreciate in value over time, well-located land with the right growth drivers in place can increase significantly in value. This growth can be fundamental not only to your property’s performance in the short-term, but also to your ability to leverage equity and expand your portfolio in future.
The important thing to remember with land value is that size isn’t the only factor to consider. Some investors think they’re making the better move by purchasing a property on a larger block of land in outer suburbs, not realising that a block of land closer to the city (whilst potentially smaller) may offer a better land value advantage.
Overpaying in a hyper-inflated market
As investors, we know that property markets, and even areas within them, don’t all move in unison when it comes to price growth. In recovering markets, in particularly, it’s not uncommon for certain suburbs to experience surges in demand as they move into the upswing phase of their cycle. This heightened demand, often exacerbated by the media, will often trigger spikes in competition amongst buyers, which can in turn lead to hyperinflation of property prices. As buyers start missing out on properties due to higher levels of competition, they become more motivated and are willing to bid at a higher price point with their next offer, forcing further upwards pressure on prices in the area.
The big danger of these markets is that there’s a lot of potential to overpay for a property beyond its actual worth, especially when those emotional motivations come into play. The problem for investors, however, is that these competition-driven price movements aren’t necessarily supported by the suburb’s property fundamentals. When competition then leaves the market and prices correct, investors who have bought in the area at the wrong time could see their property decline in value or remain stagnant for an extended period of time.
It goes without saying that overpaying for a property can impact its long-term performance and the growth you can expect to achieve in due course. If you overpay for a property by 5% over its actual worth, you may be waiting years just for the asset to recoup its value before you realise capital growth. Whilst these markets can be great if you get in early, knowing when to back away from purchasing in these areas can be equally, if not more, important. For an example of this strategy in practise, read our Belmont Case Study.
Selecting the right property
Investing in a recovering market can be a great strategy for buyers looking to capitalise on capital growth. However, in these markets conditions, you can’t rely on one factor or data source alone to determine where you should invest, and it’s more crucial than ever to remain selective in your property choice. While the right property could see you benefiting from tighter market conditions to achieve steady and strong returns, the wrong purchase could also set you back significantly in your property investment plans.
If you are looking to take advantage of current market conditions and feel you would benefit from speaking to our property investment specialists, contact our Perth buyer’s agents today to discuss your strategy and organise an obligation-free consultation.