Which is more important | Property, Location or ….?
Look, it’s always interesting when someone is making a decision on investing in property but how do they actually decide on which one makes for a great investment for their portfolio? For me, I think they got the focus in the wrong area. I think the focus on the property first where else I think there are a couple of other things that the need focus on before that.
The first thing for me is I’m a very strong advocate on getting the strategy right. Because ultimately, a lot of people are buying investment properties and they’ve got this goal on, “Look, I really want to provide for my future but I’m not quite sure how to do that. So in the absence of a strategy or a plan, I’ll just keep buying assets and hope for the best.” But if you actually design the process and the amount of money or the exit plan if you like on what you want to achieve, you can actually reverse engineer what you need to be buying today and hopefully next year and the year after in terms of what asset decisions you need to make. So for me, the Number 1 priority is to get Context of Strategy first. Now, that’s understanding what’s the purchase price, what the historical growth needs to be, what rental yield am I getting on the property and how does that overall numbers or overall approach fits into my overall investing strategy. Because if we can get that right, it takes away a whole lot of anxiety, we can take away the mystery because we do know exactly what we need to do. So strategy is critical and it’s number one but it’s probably some of the things that I don’t see a lot of investors put a lot of energy into. Largely because it is quite difficult to really predict going forward but it’s unbelievably crucial.
The next thing is not really going to property. It’s suburb/location because if you think about all of the suburbs, let’s use Australia, 15,000+ suburbs, some of those suburbs just provide for shelter.
It’s a basic human need, we need a roof over our head but they don’t quite stack up as investment grade versus other suburbs that have dual purpose being shelter as well as great investment potential. And it’s really those suburbs that we need to understand and get better at picking so you can get better performance. If we think about what really makes a suburb investment grade versus a suburb for shelter, it’s really around three things. Economic activity, human interest and human behavior. So economic activity is just a fancy way of saying, where are the people that live there are going to earn their income? Are they close to the Central Business District (CBD), is there a satellite city around them that they can earn their income from because ultimately, that’s how they are going to pay their mortgage and ultimately, that’s how they are going to reduce the amount of debt that they have on their property and pay for the basics of life under their roof. First of all, we need to know that. If we are too far away from economic activity, chances are there is a proportional decrease in the performance of the asset. Overlay that with human interest. When I’m not working, what do I want to do with my time? Do I want to go down to the local cafe on a Saturday morning and get my favorite Eggs Benedict or my favorite Latte, do I want to be able to walk to all the amenities and run all the errands that I need to do in the weekend or after work, do I want to have great open space with tree lined streets. You got to really understand what makes people ticks in their free time to understand that human interest. Equally, they want to be able to get to the train, tram or any other public transport system into the city that allows them to get to their job easily. So those are two things. The third one is largely around human behavior and two real polar opposites. The status test or what does people think of me on the positives for living in this suburb versus maybe the stigma test, on the flip-side, what does people think of me if I actually live in a suburb that has a negative stigma. Because those three things really have an impact on what makes an investment grade suburb different from just a suburb that provides general housing.
So you can see the process here. Strategy first, then we go suburb second and then the third one is about going into the property. So you choose that last. You choose the suburb first and the property second. Now, that would help a lot of people make better decisions around what they should buy. Then, if you overlay my three favorite filters when it comes to property: Owner Occupied Appeal, Investment Grade and Scarcity, chances are, if you are buying an apartment for example and you overlay scarcity, you’d buy small boutique blocks so you can satisfy that criteria rather than a really big ones or if you are buying a house, maybe some period charms or period appeal to those properties. The owner occupier appeal is largely because the owner occupiers are the ones that drive the price, not the investors, so you need that emotional pull to it. And lastly, investment grade property. Within a certain price point, call it $300,000 – $850,000. Getting the right sort of type, for me if it’s an apartment, it’s an established apartment versus a new one – all those sorts of things. You can start to really make headway to what actually makes a really good investment, if you actually do it in reverse to what most people think.
So in my view, I see lots of people go, “I’m going to buy this type of property and what I based on that, I’ll go choose a suburb and then later on I hope I get a strategy”. Where else I think we should reverse it. We should get the Strategy done first then choose the location or suburb and then finally, choose the property. If you do it in that order, I think that your portfolio would perform better than average and in my view, those comparisons that you have with your friends and other people, I think you would have a really positive comparison. I think the performance of your portfolio would do much much better if you follow that framework.