What’s Best – City, Regional or Rural Property?
A common question I’m asked is, “What makes a better investment – city, regional or rural real estate?” As you’ll see, there is an answer, but before I reveal it, let’s cover some investing theory.
Opportunities Are Not Location Specific
To begin with, an important point needs to be made –”Opportunity is not location specific” – good (and bad) deals are found everywhere.
Indeed, a saying of mine to remember is this: “As long as people live in houses you can make money out of real estate,” and this means that if you can find a problem, whether a people or a housing problem, and solve it cost-effectively, then you should be able to create wealth.
This might be finding a tenant, or allowing someone to buy a house they otherwise couldn’t buy – such as offering carry-back financing, or adding more perceived value than actual cost by doing a cosmetic renovation. The point is that problems are really just opportunities in dress-up, and problems exist everywhere.
We all have a different amount of time, money, investing skill and risk tolerance, and this means an investment that is right for one person may not be right for another.
If you already have a 9-to-5 job, then trying to be a professional property investor in your spare time, like at 9pm after a hectic day at work, is going to be very difficult to sustain. Such investors are probably better off with a set and forget strategy, such as a low-maintenance blue chip growth rental property.
Other investors choose to accelerate their wealth creation by being more hands-on, and this will require more time to find value-add opportunities and solve them. To do this successfully, such investors may need to take extended leave, or reduce their permanent work hours, in order to ‘free up’ the time needed.
As a rule, a city property will be more expensive than the equivalent home in a regional or rural area. Therefore, if you want to invest in the city, you will need more capital for deposits, and the wherewithal to qualify for a larger loan.
You probably know that I started off buying regional properties – in Ballarat to be exact. The main reason for that was two-fold: first, it’s where I could find positive cash flow properties; and second, it’s an area I could afford to purchase in.
Great investors are made, not born. You become a great investor by first investing in yourself (i.e. in education), and then using your skill and expertise to find, manage and sell real estate. In the absence of skill, an investor must speculate, and the more things you leave to chance, the more chance there is that things will go wrong.
Some people find the idea of bungy jumping appealing. I don’t. It’s too risky. Same with sky-diving, alligator wrestling, snake charming and the like. On the other hand, I’m right at home buying $100m worth of US commercial property, negotiating a tricky real estate deal, and standing in front of hundreds of people at a property seminar. This just serves to prove that we all have a different risk threshold, and one person’s risk is another person’s opportunity.
For instance, you might think that regional property is risky because the market is smaller. Someone else might feel that city properties are risky because they are more expensive. The truth is that risk is inverse to skill; the higher your skill at a particular endeavour, the lower the risk will be in doing it.
Consider open heart surgery. If I had to perform an operation on you this afternoon, then the risk that the operation would fail and you’d die is very, very high. But for a skilled heart surgeon, who does this operation many times a week, it’s just another day at the office (or, in this case, hospital).
Different investors have different goals. Some investors want growth. Other investors want income. Some investors want to negatively gear. Other investors want to positively gear. The diversity in desired outcomes allows for one person to be selling a house (because they feel the property market has peaked) and another person to be buying that same house (to create an income loss and allowing him to negatively gear with the hope of long term capital gains) to both be right.
Different properties offer different profit outcomes. By their nature, city properties have very low rent returns, but tend to appreciate faster in value (at least in dollar terms). Regional properties usually offer higher rent returns but may not appreciate in value as fast as city properties.
Steve’s Six Principles For Deciding Where To Buy
Here are six principles to consider when deciding where to buy:
1. Invest where you can afford to buy.
There’s no point looking to buy property in an area that you can’t afford. If you want to buy a city house as an investment property but can’t afford Sydney then try Melbourne, or Brisbane, or Adelaide, or Hobart. Alternatively, if you must buy in a certain suburb in Sydney, swap an unaffordable house for a cheaper unit, and see if that helps. If it doesn’t then change the suburb until it does.
2. Invest where the return makes sense.
If the city, regional or rural area you want to invest in doesn’t have real estate you can purchase that will deliver your required return within your required timeframe, then look elsewhere.
3. Invest where, and how, you feel comfortable.
You should invest in locations you know something about and feel confident investing in, and your chosen investment strategy should be one that you have been educated in implementing.
4. Invest where the majority of people own.
Investing always carries risk, but if you invest in an area where the majority of people own, rather than rent, then you are somewhat insulated against a sudden price decline like investor-dominated towns like Moranbah and Gladstone experienced.
5. Invest where a ‘pathway of progress’ is emerging.
Another Steve saying: You buy in an area as it is today, but you’ll sell in an area as it will be tomorrow. It makes sense to buy in an area that people will want to live in more and more as time goes on. The perfect situation is an area that is in what I call a “pathway of progress”. That is, better job opportunities, improving infrastructure, amenities, transport, etc. that will make the location more desirable.
6. Invest where the trend is your friend.
I often say the fastest and easiest way to make money is to find a fast moving trend and jump on it. That way – just like paddling downstream – the market momentum will carry you, and your profits, along with little effort. The alternative is to invest where the trend is not your friend. This too can be lucrative in time, but you may need to wait a while for the trend to reverse, and in the meantime, you risk losing money.
So, Where Should You Invest – City, Regional Or Rural?
The answer – any, and all!
For some it will be a regional area because they know it well, it’s affordable, and because it provides the return they want, when they want, and how they want. For another investor it will be a city property, or rural property, for exactly the same reasons.
In my case, I started off investing in regional areas, but nowadays I buy commercial property in city locations.
So, you see, it doesn’t matter where you start. Just pick somewhere that works for you.