Why investing in real estate is not like home buying
Buying property is almost a rite of passage in life’s journey for Australians. And the very first property purchase is usually a home.
Down the ages, generations of 20-and 30-somethings reach a stage where they tire of the vagaries of the rental merry-go-round such as restrictions on decorating, owning a pet, and the inherent insecurity of year-to-year leases.
Understandably, many long-term renters crave ownership of their own.
That first home purchase represents the scaling of an enormous learning curve. We grapple with estate agents, mortgage brokers and banks. There are many months and even years scrimping to save a deposit and endless open for inspections.
There’s usually a fair bit of disappointment along the way, as expectations are scaled down to reflect a budget’s limitations and the pain of being outbid on the dream home, often repeatedly.
So you might assume that the home-buying veteran is sufficiently battle-hardened and clued-up to fearlessly buy an investment property.
My experience says otherwise.
The reality is, investing in real estate is a vastly different affair to buying a home.
When you buy a home, you look for a property with the accommodation you need, in an area that you want to live in, within your budget.
When buying a home, the only opinion that matters about its features, location or accommodation is your own.
For an investment property, the equation is exactly the opposite.
Property investment is about finding a property in high demand and short supply that will go up in value substantially over time.
The only views that matter when assessing an investment property’s potential, features, location or accommodation is that of the market place, both now and in the future. It’s this balance of market opinion and underlying demand which ultimately determines its investment performance, both in terms of income and capital growth.
The smart investor never allows personal likes and dislikes to cloud their rational investment judgement.
Questions you need to ask
So before you start looking at properties, take my purpose test by asking yourself these four questions:
- Why am I buying property?
- Is my objective financial or personal?
- What do I want this property to do for me? How will buying this property affect my financial situation, now and in the future?
If your answers revolve around making financial gain, then buy the property which meets these core investment objectives.
What meets the criteria?
So which properties tend to be in high demand, short supply, go up in value and produce a solid income?
Here’s my take.
Over the investment cycle, demand for property is always highest and most consistent in the inner suburbs of our cities.
Sure, there are spikes in demand and prices in outer suburbs and regional centres from time to time, such as that in those parts of Queensland and WA currently reaping the benefits of the mining boom; but simple logic dictates that demand is greatest and most consistent in our most populous suburbs, particularly in those areas in proximity to amenities such as public and private transport, schools and medical facilities, plentiful and diverse employment, parks and village-like retail strips.
Turning to supply, we’re looking for scarcity value. In essence, that’s property that isn’t being built anymore.
For houses this is Victorian, Edwardian and brick pairs dating from the 1930s and 1940s.
For apartments, consider apartment blocks built between the 1920s and 1970s.
Art Deco properties are always in demand.
Be wary of properties where there is no scarcity of supply or some unique value such as many high-rise apartments in the CBD or McMansions in the suburbs and on the city fringe. However, there are many quality developments with unique features which are exceptions.
Locking out your emotions from the investment process is sometimes easier said and done, especially when so many marketing dollars are spent by vendors and developers that deliberately tug on our powerful nesting instincts.
If needs be, an aspiring investor should seek out the help of an independent property investment advisor.