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When it comes to real estate, location is key. That’s especially true when it comes to buying your first investment property.
Remember, this property is ultimately for investment – not your personal use. You might live there for a year or two, but your feelings about the neighbourhood aren’t that important. You need to make sure the suburb is in the right location to make you money. It doesn’t have to be a place you’d want to live in.
You won’t live there forever. After all, if you’re following our Framework you will be buying a property that will be your investment property for many more years than it is your home. So let’s treat your first home right up front as an investment property and discuss the factors that make for a great investment.
Great features, such as high ceilings and plenty of storage, are nice to have in a home. But the right location can make you money forever.
It’s the tenants who determine where they want to live. So, they, in turn, will have a major impact on the location you consider buying. Since you’re considering an investment property, you need to buy one that tenants will want to rent.
Our number one criteria is to look for a suburb where more than 30% of the residents are renters. Since you’ll be renting out your property, it’s a good idea to look for a location that’s suitable for renters.
So, how do you find a property with great investment potential?
Buying an investment property involves a different mindset than buying a property to live in it. When choosing a suburb, you need to look at:
Can you really predict the future growth of a suburb you’re considering?
You may not be able to predict the future, but you can look at certain indicators to get an idea.
Look to the past to get an idea about area growth over the years. Also, don’t forget to research all the factors that can impact your property’s capital growth. Things like:
Expert reports are another good source to find out about future growth.
Generally, these reports analyse whether an area is going up or down in value. They look at a variety of factors to make their own predictions about an area.
If you do use these reports, though, always check where the numbers are coming from. Write down your source so that you can compare the numbers to other reports you receive.
You may not agree with what’s published, and you don’t necessarily need to. They’re expert opinions based on what they see. But it may not be how you see the future growth of the area.
Even if you disagree with their findings, it’s a good idea to find out their reasoning behind the report. This can serve as a starting point for you. Integrate their findings into your own research and predictions.
Generally, demographics refers to the breakdown of an area’s population.
So, what do demographics tell you about a potential investment property area?
Usually, infrastructure and demographics go hand in hand. It’s a symbiotic relationship. For example, areas that have a lot of young families may also have many local schools to accommodate those children.
The variety of schools, in turn, attracts more young families to the area.
Areas with a lot of commuting professionals may have more access to better transportation options. That may include better infrastructure like freeways, on-ramps, and public transportation.
The reverse is also true. When a suburban area has these amenities, it may also attract more commuting professionals.
There are also other aspects to consider.
Why do people choose a suburb over inner city? Suburbs are generally more peaceful and quieter than an urban area. They also have relatively lower crime rates.
There are many major drivers that affect a suburbs’ growth. But many of them may be in place already in the suburb you have your eye on.
The main reason we look at demographics is so you know what the “typical” renter looks like. When it comes time to sell, having the typical property will allow you to market to the majority of the market. By knowing your market you can make sure you have the right property for them. You can even find out what streets renters prefer to live in using census data.
Some trends to keep your eye on include:
The ripple effect happens when buyer demand and increased property prices causes a “ripple” outward into other suburbs.
This means that buyers who can’t afford the suburb of their choice because of price increases look to the next-best suburb. Often this nearby suburb is lower-priced – until the subsequent demand reaches them. And then the ripple effect pushes into the next suburb…
Simply put, gentrification is a change of fortune for the suburb. This may mean a change in the people who live there.
Generally, it refers to a different class of people moving into the area. This new class invests their money and time into creating changes. The changes tend to increase property values, too.
Population increases and changing infrastructure may also play a part in changing the demographics of an area. Here are some of the more fun things to look out for: organic shops or doggy daycares popping up in an area. These are sure signs that a suburb is gentrifying.
How does supply and demand factor into your suburb choice? If you have a budget, as most homebuyers do, it plays a major factor in your decision-making.
Property prices at a suburb, including the ones that you want to buy in, depend on the law of supply and demand. So, when there’s a high demand for properties in the suburb but the properties are scarce, prices soar. That’s when it’s a seller’s market.
On the other hand, if there is a large number of properties for sale or for rent on the market, that can cause prices to drop.
Under-supply or scarcity also affects property prices.
Let’s say that a suburb will host the new headquarters of a major company. All of a sudden, the area floods with people looking for property so they can minimise their commute. So this headquarters will increase overall property value, sometimes even causing it to skyrocket.
Why does this happen?
You have many buyers in one area looking for properties. There’s a limited supply so, once again, it’s a seller’s market.
Knowing what the market is doing allows you to work out your negotiation strategy, which is part of our #Slam It segment of the Financial Freedom Framework.
If you are in a seller’s market, they are often getting the asking price or above – so there is no discounting going on. If you are in a buyer’s market, then the owner is often discounting from their initial price.
So if you see that the discounting figure in a particular suburb is -5%, then you could put in an offer of -7% and negotiate up to the acceptable going price in the suburb. For example, if the asking price is $400,000 and the discount is -5% for the suburb, then instead of offering $380,000 you might offer $365,000 first. Knowing the supply and demand and discounting in a suburb gives you an advantage when it comes time to make your offer.
Before you buy an investment property, research is key. You may not be able to predict the growth of a particular suburb. But you can look for certain indicators that point towards whether an area is on the rise or otherwise.
Checking rental demand for the area and buying the typical property will also allow you to have a property with little risk of it being vacant.
There are many things to consider when buying your first property – and getting it right so it’s set up forever as a growing asset you don’t need to worry about. It may cost you a little out of pocket initially, but in the long run the location is key.
Investors Choice Mortgages can help you get yourself set up to buy your first home (i.e. investment property), not just locate the right property but also get the finance to suit your needs.
Here’s what you can do to learn more.