Investing in your own backyard: the risks of staying close to home
For many investors, the first place they start looking for an investment property is their own backyard. On the surface, this strategy seems to make sense – investors are familiar with their local area and understand the demand drivers, they have real-world knowledge of the surrounding amenity, and they may feel comfortable being able to check on the property at a moment’s notice.
All of these factors combine to give investors a feeling of comfort, confidence and security. However, this comfort could be at the cost of opportunity.
Here are three reasons why buying in your own backyard may not make for a good investment – and why you should consider broadening your search.
- Limited opportunity
Property markets don’t act in unison as one big entity. The broader market is made up of many smaller markets, each with their own unique demand factors. The reality is, given how big capital city property markets are, the suburb where you live likely isn’t currently the best place to buy. You may live in a great suburb with good amenities, but the chances that your suburb is currently offering the greatest growth opportunities in the market are quite slim, and by limiting your search to your local area you may be missing out on other locations that offer better demand and supply drivers to support increases in property values. Given how tight the sales market in Perth currently is, you’ll really be limiting your investment opportunities if you restrict your property search to suburbs that you are familiar with or that are close to home.
- The investment becomes emotional
By investing in a suburb you are familiar with, you introduce emotion into the decision-making process. For example, having a strong personal attachment to your childhood suburb may lead you to view its long-term outcomes more favourably than long-term performance statistics would indicate. Not only will you be investing in a market that isn’t performing as well as you think it is, but you will also be missing out on growth opportunities in different markets. It is important to remove emotion from the property investment process and to treat it as a business decision.
- You increase your exposure and risk
Savvy investors understand the importance of diversification. By spreading their investments across various markets and locations, investors ensure their entire portfolio isn’t impacted if one segment of the market faces a sudden downturn. However, by choosing to buy an investment property close to where you live, you run the risk of both your home AND your investment property suffering falls in value due to sudden market changes, which could leave you in a dangerous equity position.
One of the best ways to protect your interests and ensure you receive unbiased and expert advice is to work with a buyer’s agent in your property purchase. Buyer’s agents are paid by, and work for, the investor – which means they serve the best interests of you as the buyer.
A good buyer’s agent monitors the entire market, allowing investors to gain access to and compare more opportunities than they might otherwise be able to themselves. The additional resources and negotiation expertise of a buyer’s agent can provide investors with the tools to invest in ‘unfamiliar’ markets with confidence.
As tempting as it may be to favour your local area for investment, care must be taken to research and compare it with other locations for its long-term investment potential. Failure to do so may mean missing out on opportunities further afield, potentially hampering your wealth creation in the long run.
For more information on how a buyer’s agent can help you find the best investment properties, find out more about how they work here.