Property investment – don’t be blinded by price

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Lately I’ve been noticing just how many investors use the wrong parameters for choosing the right investment property, either to buy in their individual names or to place into self-managed super.

The number of people who call in to my show Your Money Your Call and say something to the effect of ‘I want to buy an investment property to the value of $600,000, should I buy in Bondi or Fitzroy?’ seems to be increasing. The problem with this statement is not so much that they are limiting their choice to just two areas (neither of which is a hotspot, incidentally), but that they are using a price range as selection criteria! The amount of money you have available to you, and what you are prepared to pay for a property, is of consideration only in determining where you can’t buy (if it’s outside of your budget), and the price of a property has no relationship to its ability to perform as an investment!

A better approach

If you have yet to commence buying property, or if you are ready to add to your portfolio with the next one, there’s an approach which needs to be taken which isn’t really price driven initially. You must start by researching, and narrow down areas which display known growth drivers, so that you can ensure that whatever property you end up buying, you have selected it from within an area that you have at least determined has growth potential.

There’s no such thing as a ‘gut feeling’ that an area will grow, nor does past growth indicate in any way that future growth will occur. The notion that the higher the price, the better the growth is not only not correct, the facts simply show that more often than not, higher priced property has lower overall growth.

Next, you should ensure that the general yields of the area provide a cash flow that is within your capacity to support (or within the super fund’s capacity to support) and then establish how much you need to pay to buy a property there, ensuring you select properties which are below the median price.

Such property has more room to move and tends to grow just as well as median priced property, and often at a greater percentage than property above the median. If the price of such property is over your budget, then you need to move onto other areas on your list, but if it’s below it, then it doesn’t mean you keep looking until you find something more expensive!

Not the right driver

Note that the price of the property is most certainly not the driving factor behind property choice, and the amount you pay is in no way an indication of the future viability of any property as an investment.

Using a price guide as your starting point is bound to point you in the wrong direction, and mean that you more than likely miss out on investing in one of the many hotspots that exist all over Australia, all the time.

Using ‘Australia’ as your starting point, then narrowing your selection down to areas displaying strong growth drivers, before you decide how much you are prepared to spend, is a method that will improve your investing success and result in well- chosen properties in geographically diverse areas.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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