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The big misconceptions about investing in real estate

Tuesday, 12th Mar 2019

As one of the most popular investment asset classes in Australia, property is an incredibly exciting industry to be a part of. However, the real estate sector can also be subject to a lot of misinformation. With such an abundance of advice and market news out there from different sources, deciphering useful advice from misleading information can often seem like an impossible feat, especially if you’re entering the market for the first time or investing in an unfamiliar location. In this article, we address five of the biggest misconceptions about investing in residential real estate.

Australia only has one property market

Real estate mistakes

A lot of people will already be familiar with the concept of the property clock, but one of the most common mistakes buyers and market commentators make in the real estate industry is applying property market statistics to Australia as a single property market. This generalisation is something we often see in the media and news reports, but Australia is in reality home to a vast number of property markets, all of which are at different stages of their cycle and subject to different market drivers. Take Sydney and Melbourne as an example – whilst these capital city markets are both experiencing significant levels of decline after coming off the peak of their property cycles and entering their downswing phase, we’re actually seeing the opposite scenarios in Perth and Brisbane, with these markets at the bottom of their cycle and showing early indicators of recovery following a period of decline.

Whilst often impacted by the same national regulations (something which is in itself a subject of dispute amongst many property experts), it’s important to note that each of these markets and economies are also influenced and driven by different industries. For instance, whilst Perth and Brisbane are largely driven by the resources industry, which means their property markets tend to perform better when the resources sector is performing strongly, Sydney and Melbourne are largely founded on the financial industries. As such, the latter tend to be more influenced by movements in the financial sector, as was seen with the Global Financial Crisis and the negative impact this had on these capital city markets.

All properties move in the same direction as the market

In a similar vein to the property cycle, another frequent misperception in real estate is that when a market is growing (or indeed declining), all properties within that market will be behaving in the same way. However, whilst statistics such as median house price can be integral in providing an indication of the overall performance of a city and the direction in which a market is headed, they don’t necessarily reflect the performance of every single property and suburb within that location. Even within separate markets, individual sub-sections will be at different stages in their property cycle and experiencing growth at different rates.

Perth has been a prime example of this in recent times with the emergence of its two-speed market. Despite the overall perception that the market is in a state of decline (which is true of the median house price and oversupplied outer suburbs), areas of the city’s sub-regions have been recording price growth for over a year, due largely to rising demand from trade-up buyers. For this reason, it’s vital that buyers conduct in-depth research not just of a wider area, but also of individual suburbs and properties when looking to leverage market opportunities and (equally importantly) minimise their investment risk.

Sticking to what you know is always best  

It’s often natural instinct to look towards areas you’re already familiar when investing in real estate. This can understandably be somewhat of a comfort zone for buyers as it will often feel like the safer approach given they already have a strong knowledge of these markets and their features. However, limiting property research to such a small radius can often lead buyers to miss out on better investment opportunities elsewhere. In fact, by the time investors have narrowed down their search to properties that align with their budget, expectations and wider investment strategy, they may be left with a significantly lower number of properties that actually meet their criteria. As tempting as it may be for buyers to stick to what’s familiar, expanding this search radius could help investors identify areas and markets with higher growth potential, and potentially find more lucrative investment opportunities as a result.

Property is a set and forget investment

Whilst it would be great to be able to purchase a property and sit back whilst that asset increases in value, this also isn’t a realistic approach for investors looking to achieve the best possible outcome from their portfolio. Realising the full potential of a property isn’t just about selecting the right asset in the first place (although this is incredibly important), it’s also about effectively managing and monitoring that asset to enhance the property’s performance and ensure it remains aligned with market demand.

Proactively monitoring the market for value-adding opportunities, managing tenant relationships effectively and identifying strategies to maximise a property’s rental yields are all crucial in optimising an investor’s portfolio and enabling them to make the most of market opportunities. However, this approach also requires time, in-depth market knowledge and detailed research – something which often isn’t achievable for buyers with other full-time commitments. Finding a property manager who understands and actively supports these needs can therefore be crucial in helping investors maximise the long-term value of their property and enhancing the performance of their overall portfolio.

Buying cheap is always a good way to enter the market

Purchasing a cheap property to enter the market can be a very tempting strategy for first-time buyers or novice investors. However, whilst budget is a crucial factor to consider, purchasing a cheap property to get into a “better” suburb or enter the property market sooner can also be a risky approach, and one that won’t necessarily pay off in the long run. These “bargain” deals may seem great on the surface, but it’s important to remember that in most cases, a cheap property is cheap for a reason – because that’s what buyers are willing to pay for it. In many cases, this lower price point can also signify a wider problem with a property – perhaps noise pollution and traffic from a nearby highway, or lack of demand from buyers and tenants.  Whilst purchasing a property within one’s means is incredibly important, it’s vital buyers also consider factors such as local supply, rental demand and nearby growth drivers to ensure they’re selecting a property that also supports their wider investment strategy.

Identifying the right advice amongst all the information that surrounds the property industry can be challenging for buyers. However, surrounding yourself by the right professionals and engaging a team with an in-depth knowledge of the local market can help you navigate these complexities and ensure you’re making informed investment decisions that support your long-term goals.

If you would like some expert advice on your next property investment or  would like more insights on the topics discussed above, contact our team to organise an obligation-free consultation with one of our property investment specialists.