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Mistakes to avoid when buying an investment property

Thursday, 26th Nov 2020

As Perth’s property market continues to recover, investors are becoming more active with many looking to re-enter the market or make their first investment purchase.

Perth’s stage in the property cycle and relative affordability offers plenty of upside for investors. However, not all investment properties are created equal and buyers without the right property selection criteria run the risk of purchasing an investment property that will fail to benefit from the rising market. Here are some of the mistakes our buyer’s agency team have observed in recent months, and some advice on how to make sure you avoid them.

 

Buying in an undesirable pocket of a great suburb

If you think you’ve found the perfect suburb to invest in, don’t forget to further refine your research to ensure you aren’t making compromises on the property’s individual location. While a particular suburb may appear to tick all the boxes on the surface, certain pockets may be exposed to undesirable factors that can negatively impact future price growth.

Industrial areas, main roads and busy shopping centres are factors that can all hurt the price growth of properties in close proximity. During home opens or inspections, take the time to explore the area around the property; this will give you a good understanding of any negative aspects of that location. For investors looking to purchase in a compromised area, it is worth considering neighbouring suburbs that may share many of the similar attributes, but without the negative factors that have the potential to hurt property prices.

 

Paying too much in an overheated suburb

Property markets don’t act as a single entity and smaller subsections of the market are often subject to their own unique supply and demand factors that create movement separate from what the wider market may be experiencing. With Perth’s property market currently in a recovery phase, these smaller market subsections are particularly susceptible to unique demand surges and price growth.

As a particular suburb or area begins to show signs of sustained price growth it will begin to attract the attention of buyers and in some cases, even the media. This heightened interest in the suburb creates hype that plays on the emotions of buyers and can lead to artificially inflated prices as buyers compete to enter this market.

The issue with a hyper inflated market, especially for investors, is that this price growth may not be supported by the suburb’s underlying investment fundamentals. When the hype and competition peter out, property prices may adjust, and investors could face the prospect of seeing their property value stagnate, or worse, fall.

Hotspots can present fantastic investment opportunities if you recognise leading indicators early enough, however, if prices have already risen considerably then it may be worth investigating neighbouring suburbs to avoid overpaying in a hyperinflated market.

 

Placing too much value on new infrastructure projects

As Australia recovers from the COVID-19 pandemic, governments are investing in a broad range of infrastructure projects and economic stimulus packages, especially ones that serve the outer fringes of the metropolitan area. Infrastructure projects can act as a catalyst for price growth if they are constructed in the right area, however, buyers should be wary of projects that target the suburban fringe. While this new infrastructure will be fantastic for residents that currently live in these communities, they shouldn’t compel an investor to buy in these suburbs. Despite new transport options and reduced commute times, these suburban fringe suburbs will still suffer from factors which restrict property demand, such as their distance from employment and limits on household income growth, which are likely to reduce their capital growth over time. It’s also critical for investors to recognise that supply is not weighted evenly across a property market – some suburbs and areas are tightly held, whilst others will be more exposed to oncoming supply of new properties. Suburbs on the outer fringes of the metropolitan area often face significant supply of new properties over time, which can undermine long term returns for investors.

By contrast, infrastructure projects closer to the city might be smaller, but they deliver amenity and value to areas which already have long-term demand. Additionally, they do so without adding significant new property supply competition to the area.

 

Researching property can be a complicated exercise and it is easy for buyers to miss small factors that can have a big impact on the performance of their investment. If you’re on the property hunt, it is important to keep the above factors front of mind when browsing properties. If you want to avoid making a costly mistake, our buyer’s agency team are local area experts who specialise in researching properties on behalf of buyers. Get in touch with us here for an obligation free consultation.