Recognising an ‘Investment Grade’ Property
We are often asked by people “What are the good suburbs to buy in?” If we could pick a better question to ask a Buyers Agent though, we would ask them “What makes a property an investment grade property?” The answer is not all that detailed, however SO many people get it wrong. Like one of team member says, “it’s simple but it’s not easy!”
There are only seven key things any investor needs to get right when selecting an investment grade asset; and those seven things are:
1. Is the property SPECIAL?
By special, we really mean – will buyers queue up to buy such a property if it ever goes to auction or private sale? Some agents call it the ‘scarcity’ factor, while we call it the ‘lacking imperfections’ factor. In this discerning, tough, buyer’s market, we need to know that an asset we select for a client today would be in tight demand again tomorrow. Right now, even though we are reading reports about the market being a buyer’s market, we’re watching ‘imperfect’ properties languish on the market while ‘perfect’ properties are still snapped up under tough competition at good prices.
2. Is the area a good lifestyle area for your target tenants?
If you are choosing a location which young cashed up professionals are gravitating to, are there cafes, transport, and easy access routes to the city nearby? Nearby must mean walking distance (i.e. staggering distance!). And if you are looking at an area where young families are flocking to, are there schools, coffee shops, parklands and bike paths? It really pays to understand your target demographic and look for the things which are important to them.
We recently had a client who was looking in St Kilda and was bothered that the apartment didn’t have room for a dining table. With Acland and Fitzroy streets outside, why would a tenant care for a dining table? He laughed when we pointed that out.
3. Is the street/block friendly and safe?
After all, who would want to live in an unsafe area? Sometimes unsafe tenants.
4. Is there a strong rental demand in the area for THAT type of asset?
It’s no use if the rental appraisal is high but the vacancy rate is also high. As Robert Kiyosaki says, “an asset is defined as something that generates an income”. We often have this argument with investors who don’t take vacancy rates and rental demand into account.
5. Are there growth drivers for that asset?
This is the most fundamental of all seven points, because without growth drivers, the property could look good on paper but may either be a speculative purchase with no firm strategy behind the purchase, or it may languish and not outperform the market.
An outperform result is the reward that any investor gets once the journey is underway – and the outperform nature in the property means that it will continue to deliver into the future. It is important to be able to recognize what constitutes a growth driver as opposed to a value booster. Some properties show a rapid but stunted growth while others just keep on keeping on. But this topic is another article for another day!
6. Are you getting the asset for a competitive price?
It’s all well and good to tick off the previous five points but if you pay too much for the asset you are already potentially in negative equity. Inversely, as many well known investors say, if you can buy well at the start you can harvest equity without actually doing any physical work to the property.
In this challenging and cautious market, nobody should be so sure that an overpayment will be corrected by a run-away market. Research well, prepare thoroughly and bid confidently.
7. Does the property fit within your overall investment strategy?
Too many wannabe investors simply think they that need to buy any investment property to create wealth, but just like shares, property can deliver different types of performances. Let us explain – Great Share Investment Advisors and Financial Planners will take a look at your overall wealth position, your time to retirement, your risk profile, etc. Then they will recommend appropriate shares as part of your overall investment strategy, which might either have a capital growth focus or yielding/income dividend focus. Property should be no different, as you can obtain both types of investment grade properties – capital growth or high yielding.
A Property Investment Advisor worth their salt should start with the overall strategy and then identify the investment grade asset that best suits budget, performance, risk appetite, household cash flows, etc..
Again – simple in theory but not so easy in practice. If you are not sure on what you are doing get independent help or advice.