How Does a Property Investor Ensure that they Buy Well?

Every aspiring property investor is gripped with fear about the impact of their selection when I first meet with them. Their questions range from “where should I buy?” to “what do you think of off-the-plan apartments?” The answer is simple – there are MANY factors that you need to take into consideration to ensure that you buy well; it’s not JUST about the suburb or the property type.

First Step

The first (and most important) step that an investor must take is to figure out how much money they are prepared to spend on this asset, both upfront (purchase price plus purchasing costs), and ongoing out-of-pocket costs each month/year. Many investors overlook this second cost implication and this oversight can be damaging to any property strategy.

We once saw an investor couple purchase a cheap coastal property but unfortunately they hadn’t given any thought to tenancy demand and hence cashflow. This little asset depleted their cashflows very quickly and unfortunately they had to face the prospect of selling it shortly afterwards.

The important message in this example is that a property investor should make sure that the asset they select is in an area held in tight demand by tenants, and that their specific asset is desirable to a tenant in this area. There are many ways to do this but it does involve a combination of careful demographic research and conversations with reliable local managing agents.

Second Step

The second step an investor should take is to decide what sort of ‘returns’ they are aiming for. They may want a rental return which covers their outgoings (i.e. a neutrally geared property) or they may provision a specific upper limit per month – in which case the projected cash-flow must be back-calculated to ensure the property meets their cashflow requirements.

It’s only human nature to want the best returns possible from anything you invest in – so it’s only natural that anyone claiming ‘next hot spots’ will get the attention of a new investor.

The biggest risk a property investor can take though is to buy in a ‘hot spot’ without looking closer at the asset type they have selected. I have seen some of the biggest property investing mistakes made in ‘hot spot’ areas. One investor we met had purchased a cool new apartment in Melbourne’s Tooronga Rd precinct. The area was great, the unit was desirable… However the problems were he’d bought at the top of the price range for those types of property and the outgoings for Owner’s Corp alone were $5500 per year.

This oversight unravelled his strategy because the outgoings meant that his subsequent investment purchase plans were inhibited since he couldn’t manage to service a second loan and given the value of the property was the top of the market the growth in values were impacted by lack of demand at the top end.

Another mistake we saw in a hotspot was a purchase of a serviced apartment. The purchaser couldn’t find a lender to finance the purchase on a normal Loan to Value ratio which meant that they had to contribute money from their personal savings. The biggest issue that they faced though was that the apartment grew less than 1% four years later. The key message that they unfortunately learnt was that an asset has to be desirable to other buyers or investors for values to grow.

Third Step

Another step an investor must take is to analyse the pocket (and street) which they are buying into. Every fabulous suburb has a less desirable area – we have not yet come across a suburb where every single property in that suburb represents a great selection.

We have seen buyer purchase on a train line and while they were excited at the time to get the property at a huge discount relative to the market, it took them 11 months to sell the property five years later.

Another investor purchased a gorgeous Victorian property which he didn’t realise had an application in local council for a high rise development directly across the road. The implication for him if the development got approval would be that his property could be overshadowed, the street would become crowded, and the ‘nature’ of the street would be severely impacted – hence the value of his property could be undermined.

There are many factors which investors should take into account when formulating their next purchase strategy. The best over-arching advice we can offer at Empower Wealth – “if it seems too good to be true, do your due diligence.”