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Ignore the Cliches
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- Created on Friday, 15 July 2011 14:17
Over the years residential property has proven to be one of Australia’s best performing investments.
It is favoured for many reasons, most importantly because of its history of growth and capital stability. However, while property has created wealth for thousands of everyday Australian’s, it is by no means a sure bet.
Buying property is the biggest investment decision most people make in their lives. Yet surprisingly, many Australians buy property with little or no investigation into the factors that drive individual property performance.
Instead, they base their decision on assumptions, inadequately researched or incomplete information or third party assurances that the property they are considering will provide them significant return on investment.
Unfortunately, in the digital age misinformation is prolific and the cause of many poor investment decisions. Even well trusted beliefs can prove misleading for the most experienced homebuyers and investors.
However, questioning the validity of property clichés and commonly held assumptions can help both buyers and sellers make better informed decisions when it comes to investing for their future.
Location, Location, Location
The most well-known property cliché, location, is quoted as the quintessential factor when it comes to property selection. But, what many buyers fail to realise is that location is far more than just the right suburb or even the right street – it is as specific as the lot number or position in a block of units.
While neighbouring properties may appear similar in many ways, factors such as aspect, orientation, floor plan and levels of natural light, not to mention security, all have an important impact on property value beyond the underlying land value.
Hot spots
It’s not uncommon for investors and buyers to chase the next big hot spot with hopes of making a quick buck. But, hot spots aren’t all they’re cracked up to be.
By definition a hot spot is a suburb or area predicted to benefit from rapid short-term gains in value. However, despite an initial spike, a hot spot is usually characterised by slow or limited growth in the long-term that often eventually undermines short-term gain.
Due to the high transactional cost of property investment real estate should be viewed as a long-term proposition, which means hot spots often fail to provide the exceptional growth buyers hope for.
Timing is everything
Analysis of historical sales data clearly shows that it isn’t when you buy but what you buy that’s important. Purchasing a property based on price alone is no guarantee of future growth performance. Selecting the right property with the right profile for growth will ensure property owners have an asset that performs irrespective of wider market conditions.
Keeping up with the Jones’
Some of the best performing properties aren’t glamorous at all. When buying property don’t be fooled into thinking the more you spend the greater the likelihood of good capital growth. In fact, buying a flashy new property or one considerably above a suburb’s median price can limit buyer demand and subsequently growth. When investing, don’t buy property that appeals to buyers’ aspirations. Buy the one that caters to the financial and social requirements of the potential tenants and buyers in the area.
Sitting on the sidelines
During uncertain economic times it’s common for buyers to withdraw from the marketplace in anticipation of property prices reaching the bottom. However, adopting a ‘wait and see’ attitude to buying and selling real estate can be disadvantageous.
The reduced competition during a downturn can create good opportunity for savvy buyers. But history shows that most buyers tend to return to the market after a positive shift in sentiment, and subsequently values, has already occurred.
Those that have bought well needn’t worry about selling in a downturn either as quality real estate assets are always in high demand.
So don’t wait for others to make the first move. Base your decision to buy on your personal financial circumstances, not market sentiment.
Buy the worst house on the best street
Buying the worst house on the best street can seem like a cost effective way of attaining that sought after location, however, it is not without risk.
In this instance the goal is commonly to transform the property from the worst to one of the best properties on the street. However, any saving on the initial purchase is often quickly absorbed by renovations to improve the property.
Conversely, deciding to leave the property in its original purchase conditions can have negative implications for the property, which will be reflected in future capital growth.
It may actually be more cost-effective to buy a better property and forgo the expense, stress and risk of renovating.
Think outside the box
When it comes to investing in property there is no need to reinvent the wheel. Properties that offer the best returns aren’t necessarily architecturally unique or modern. In fact, they are more commonly well-located inner city period and pre 1970s properties.
Property selection isn’t a guessing game. Stick with tried and tested selection methodologies that rely on empirical sales evidence, not speculated or high-risk returns.
A renovators dream
As a number of new renovation property programs hit Australian television screens the would-be ‘handyman’ in us all considers the prospect of buying and renovating to make a quick buck. But novice renovators often underestimate the commitment required to transform a property, which can cost them significantly.
When deciding to renovate it is important to consider where the property is located, the type of property e.g house or apartment, whether it will be a rented investment property or owner-occupied and who the potential buyers or tenants of the property are. Put simply, sellers should renovate to their target market.
It is also important to be wary of overcapitalising in a property, as the amount spent on renovations may not offer an equivalent return in the increased value of the property. A good rule of thumb is to not spend more than 20 per cent of the property’s value on renovations.
Up and coming
When it comes to property don’t speculate. Purchasing on the basis of proposed future infrastructure such as roads, schools, shopping complexes and communities is risky. Hundreds, if not more, development proposals are put on hold or denied every year and when approved can take many years to build. There’s also no guarantee that the added amenity will add positive weight to local property prices.
When buying property there is no better way to measure an assets future growth than to look at it’s performance history.
Buyers must understand that property selection is not just about the suburb or about timing and transitional trends. Rather, it’s a process unique to the individual circumstances of the buyer or seller and the property.
