How to make your home a stepping stone to your investment goals

Tuesday, 14th May 2019

For many buyers, their home is not only a chance to gain the benefits of property ownership, it’s also a stepping stone – a rung on the ladder towards their long-term financial and investment goals. Unfortunately for many home owners, this dream often falls short.

In our 12 years as property advisors, we’ve seen many buyers whose home has stagnated, or worse, dropped significantly in value due to lack of research and understanding of the local property market. Instead of being a launching pad to propel them towards their next investment, some homes can become a financial drain that hold buyers back from the financial and lifestyle goals they’ve been aiming for.

The truth is, not all properties perform equally – and the cost of buying the wrong first home could be higher than you think. So what are some of the fundamental factors owners overlook?

Factor 1 – The impact of land value

Property ladder

We often hear the phrase “land appreciates, buildings depreciate” in property, but this is also a factor that becomes a stumbling block for many aspiring investors. One of the key reasons behind this is the allure of new construction. New properties look appealing and hold the potential for lower maintenance costs in the first few years of ownership, so it’s easy to see why many home owners are drawn to them. However, this can also end up being costly in terms of capital growth, the reason being that it’s the underlying land that’s the appreciating asset.

While houses slowly depreciate in value, well-located land can grow significantly in value over time. This improved land value can not only allow home owners to sell at a gain, it also provides extra equity which can help them finance an investment property or upgrade their home in the future. This isn’t to say buyers won’t be able to find or develop a new property with strong land content – with the right research and risk mitigation factors in place, building a new home can actually hold a number of benefits for buyers who are suited to this strategy. However, factors such as location will be key in determining the success of this strategy, and those buying a brand new property will need to bear in mind they will essentially be paying a premium for an asset that will depreciate over time.

So, what’s the secret to land value?

When it comes to land value, it’s important to remember that size isn’t everything. Some buyers think they’re making the right move by purchasing a house on a larger block of land in outer suburbs, not realising that a smaller property closer to the city might offer a better land value advantage. Depending on its location, a brand new house & land package will often have less than 50% of its value in the land, while an established villa or duplex unit closer to the city and in a similar price range will often have its land value at 50-60% or even higher, and may constitute a safer investment.

Factor 2 – The impact of property supply

Property prices, like the value of any goods or services, are largely driven by supply and demand. Many buyers consider demand when choosing a location, and factor in benefits like proximity to employment, the coast or the river, local amenities and other lifestyle preferences. However, they often don’t realise the impact of local property supply on the price growth of a property over time.

The supply of properties for sale is not evenly distributed across Australia’s capital cities. In every city, there are suburbs which are tightly held, where buyers are regularly competing to secure a property. This regular buyer demand and competition places pressure on prices to increase over time. By contrast, there are other locations that have significant supply of new properties (such as new developments nearby), or a regular resale of existing properties into the market. Not only this, but in some of these areas there is often more supply still to come in the future, which means that owners are regularly competing with an influx of newer houses when they try to sell – a factor which can keep prices stagnant over time. Home owners who buy in these oversupplied locations can find themselves waiting years for the next ‘boom’ instead of enjoying the steady capital growth they might receive from areas where supply is more restricted.

Factor 3 – The importance of unbiased advice

Many buyers will often rely on the information provided to them by selling agents and builders when making investment decisions, not realising that there are other avenues of unbiased advice that are better suited to their needs.  Selling agents work on behalf on the seller, and as such the advice they offer won’t always put your interests first. If you’re buying a property, you can hire a real estate agent, known often as a buyer’s agent, to represent you in the purchase. A buyer’s agent can help you access inside information about properties and suburbs, conduct due diligence on the property prior to purchase, and negotiate the contract price and conditions for you. Most importantly, however, they work on your behalf as a buyer. This can save you time, money and stress in the short term, giving you a significant head start on achieving your property goals before you even move in.

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