8 Crucial Questions for Determining Where to Buy Your Next Investment Property
I speak to a lot of aspiring property investors. Without a doubt, the most commonly asked question I hear is, “Where should I buy?”
The problem in finding the answer is that everyone has an opinion on where they think is best. The next time you’re having some drinks with friends, throw this question out and see what happens.
You’ll likely find yourself instantly surrounded by a team of “experts,” quick to recommend an area they’ve read about in a magazine.
Even amongst those who claim to be the true property hot-spotting experts, you’ll often find varied and conflicting advice. Some people recommend larger regional towns, while others recommend mining towns, while still others say to always stay within a certain radius of the Central Business District (CBD). So, who should you listen to?
The answer is simple: listen to yourself. I’m not talking about following your gut instinct. Truly competent property investors do the hard work of researching and assessing areas in order to develop their own well-thought out opinions.
To set you on the right path, here are eight questions that every property investor should ask before buying an investment property:
1. Are Home Values And Rental Prices In The Area Increasing Or Decreasing?
Property values tend to be cyclical, as this recent article on Australian house prices suggests. While we have seen growth in Australian property over the long-term, we can’t chart that growth up in a straight line.
There will always be periods of appreciation, followed by periods of decline. You should form an opinion about where a particular area is in this property cycle.
By examining the current and historical data, you’ll be able to see clearly how the numbers in an area are trending. When you compare the median house price to median income, you’ll have an idea of how affordable the properties are, and how that may play into future property values. Rental yield and vacancy rate figures will also give you a picture of demand for the area.
2. Is The Workforce In The Area Growing, Shrinking Or Stagnant?
Strong employment is one of the primary drivers for home values in any area. Of course, people want to live relatively close to where they work.
Demand, and therefore the value, for real estate goes up when an increasing number of people are attracted to an area. If enough people subsequently move away as demand decreases, there will be an excess supply of housing, causing prices to fall.
The type of industries that are attracting employees to the area will also affect home values. Properties in blue-collar areas tend to appreciate at slower rates than homes in higher-income, white-collar professional areas.
3. How Desirable Is The Area?
The most popular and in demand areas offer residents something they desire. One of the most basic human desires comes from a need for security and safety. Therefore, areas with higher crime rates will significantly reduce the desirability of an area for most people, driving home values down.
Other factors that impact the desirability of an area include the image and reputation associated with the postcode, the area’s climate and access to views of water, hills, or the CBD. These most desirable areas will have homes that tend to appreciate in value quicker than other areas and have lower rental vacancy rates.
4. What Are The Demographics Of The People Who Are Attracted To The Area?
A demographic study of the people in an area will include information, such as ethnicity, average age, marital status, family size, educational level, employment and median income.
Different types of people demand different things from an area. For example, families with children will desire larger blocks with backyards for their children to play. Retirees will likely prefer smaller, more manageable blocks of land on which to live. Understanding an area’s demographics will give you insights into that area’s current and future needs.
5. Is Infrastructure Expanding Or Improving In The Area?
You’ve probably seen properties advertised as having quick and easy access to a major freeway. Because people generally prefer shorter commutes to work, areas with expanding or improving infrastructure tend to be in higher demand.
Infrastructure improvements include not only upgraded roads and transport corridors, but also commercial developments, access to hospitals and expanding utilities, such as high speed Internet. All of these improvements will create the need for more jobs and make the area a more desirable place to live.
6. How Much Available Housing And Land Is There In The Area?
Scarcity is a primary driver of value. In smaller towns where commutes to work are relatively short, no matter where you live, land is plentiful and property values are lower.
On the other hand, in suburbs closest to large urban centres where the majority of the jobs are found, land is much scarcer. This scarcity increases competition amongst buyers and drives up home prices.
Knowing the supply of available housing and land will also help you discern the highest and best use of a property. For example, a larger property in an area in short supply of land might be ripe for a subdivision and development.
7. Is The Area Affordable?
Affordability is a function of home prices, because it relates to median income and is often expressed as a ratio.
For example, if the median house price in an area is $300,000 and the median annual income is $50,000, the affordability ratio would be six to one. In other words, home values are six times that of annual incomes. The higher the ratio, the less affordable the area.
Sydney’s median home price to median income ratio is currently nearly ten to one, while the most affordable towns in Australia are closer to three to one. The median home price in Hong Kong is a whopping 17 times income.
There will always be a limit to what people are willing and able to pay for housing, so the less affordable an area is, the closer it is to reaching that limit and downward pressure on values could be imminent. If the area is more affordable, it could likely attract more people, which could either undergird current values or lead to future appreciation.
8. What Amenities Contribute To The Quality Of Life In The Area?
An amenity is a desirable or useful feature or facility that that makes an area a more pleasant, convenient, comfortable or enjoyable place to live. Examples of amenities that improve the quality of life include access to public transport, quality public and private schools, local community centres and swimming pools, shopping centres and local parks with play areas, and barbecue facilities. Natural amenities might also include local rivers, lakes or beaches.
Areas with the most desirable amenities tend to attract the most people. Therefore they experience higher levels of home value appreciation, and lower rental vacancy rates than other areas.
Conclusion
When you stop relying on your emotions and the opinions of others, and take responsibility for doing the hard work of researching yourself, you’ll be better equipped to make sound investment decisions.
You may have heard Steve McKnight talk about the importance of becoming an area expert. The more you learn about an area, the easier it will be to turn facts into a well-reasoned opinion.
Students have found that some of the most beneficial sessions in our Property Apprenticeship course are the two on researching and assessing areas.
Steve breaks down exactly how to become an area expert. He’ll also equip you with a template to turn your research into a systematic assessment rating for each suburb you explore.
You can learn more about Steve’s Property Apprenticeship course here.
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