What location should I Invest in?
The first question we are often asked is 'where should I invest'? It might be 'which city should I invest in?', or should I invest in Brisbane?' Alternatively, it might be 'which are the best suburbs right now to invest in in City X'.
For most investors, this is not the right place to begin. There are key elements of a property investment strategy that need to be determined before you choose a location, such as:
- your investment time frame
- the asset class of property to invest in
- what purchase price and holding costs you can afford
- your investment risk profile
This will differ for each investor. There are, however, several critical factors we look for in a property market before we recommend investing there. Unlike with shares and managed funds, you can't spread your investment property over a number of businesses or countries; you do have to pick a location for each property and stick with it. Given that most successful investors are likely to only buy a few investment properties over a lifetime, location does matter. The good news is that if you follow a clear set of rules, you can minimise your risk and maximise your return.
What should I look for in a property market?
Critical Mass - Does the property market you're investing have a sufficient critical mass of people, jobs and infrastructure? In practice, this means our larger cities. Australia's major cities have the highest paying jobs, a diverse range of employment sources, modern transport infrastructure such as motorways, commuter trains and international airports, and the kind of culture and lifestyle demanded by most of the population. This isn't going to suddenly change overnight - our cities will continue to attract the lions share of wealthy and educated people, who will pay a premium to live in the best locations. This will both increase your returns in the good times, and buffer you from losses during any downturns. Smaller locations, particularly those reliant on one or two major employers, are much more volatile and vulnerable to sustained slumps. Is that the kind of risk you want to take with your property investment?
Historical Performance - While many investors are out searching for the next 'boom' location, we find that focusing on the long-term historical performance of a market is a better approach for the property investor. The rules of property evolve gradually but they don't change - the markets with the best access to jobs, infrastructure and lifestyle have been the most in demand and will remain so. There is a natural temptation to want to make as much money as quickly as possible by 'beating the market', but our experience suggests this is where most investors come unstuck. Buying the best property in the best area you can afford is a safe and proven path to making money out of property.
No matter what market you buy in, timing does matter. Buying at the bottom of a market can supercharge your returns, while buying at the top of the market can set you back for years. Looking at a long-term example, if you bought in Sydney at the median price in 1984, at the bottom of the market, and held it until now, you'd have achieved an 8% growth rate per annum. If you'd bought in 1990, at the top of the market, you'd have only achieved a 6.6% growth rate per annum. The difference in these two growth rates in actual terms is the difference between owning one property and owning two - you could have bought two properties in 1984 for the same price as one property in 1990. Like we said, timing matters.
Of course, if it were easy to get the timing right on an investment, everyone would be doing it. The reality is, no-one can predict market timing for certain. We do have good methods of evaluating a market, however, and we can help you to reduce the risk of buying at the top of the market.