WHAT MAKES A GOOD PROPERTY INVESTMENT?
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What makes a good property investment?
This is a question that many of us who are already on the property market think about constantly. We think about it because we want to secure our financial future, both for ourselves and for our families.
Today as I discuss, it must be noted that I’m not a financial advisor. All of these opinions and observations are based on my 15 years in the finance industry.
I’ve discovered that to figure out what a good property investment is, I should take into account the experiences of both people who have succeeded and people who have failed in this field.
1. Get clear on what your goals are
So rule number one, what is your goal?
When I ask most people on what’s important to them about buying a good property investment, many of them tell me it’s for capital gain. When I hear those words, it honestly makes me cringe because that’s ridiculous. You don’t buy a property and want it to go down in value.
Many people want to get rich quick through property investment, but want to do nothing to achieve that. The problem with that is, there are millions of Australians that already want to get rich that way, so the probability that you’re going to be successful through capital gain is very low.
So, when you’re defining success, you need to know what your actual objective is.
You have to think about, “what is it that I actually want to achieve?” “What are my financial goals?”
Because most people don’t think about this for long enough; they just start thinking about the solution right away.
This is because they haven’t thought hard about it, their solution is just to make a heap of money. It’s not a strategy that works. It’s a strategy that fails majority of the time. So understanding your goals is very important.
If I could point someone in the right direction, it would be to ensure that you have enough income for your retirement.
Let’s face it. Most of us are going to live beyond 90 years, which means retirement should be planned carefully. The question is, how are you preparing for it right now?
2. It’s all about the yield
The next important thing in identifying what is a good property investment is the yield. Keep in mind that the higher the property price goes, if the rent does not come up with it, the yield goes down.
Let me explain why this is a problem. Basically, how it works is that a low yield at 3.5% works well in an environment where the interest rates are decreasing, because your costs to hold that property are decreasing.
But when you’re in an environment when interest rates are increasing, your costs to hold that property go up very quick.
So in the last three months, the costs to hold those properties have gone up 20% to 30% because the interest rate has risen so fast that it’s now trapping people.
I’m talking to borrowers every day that are really fearful that if the rates go up, they’re going to get hurt by this inflation.
This is the problem. When you’re getting a 3.5% yield and you’re buying in a place like Melbourne, you don’t have the income to back it up. All you’ve got is borrowing. If you understand economic history, it will tell you that the guys holding the most debt get wiped out.
Now, I want to link this back to rule number one – what’s your objective? Is your objective to get wiped out? No, your objective is not to get wiped out! Actually, if you get wiped out, that puts you the furthest away from achieving your goals. It doesn’t seem to make sense.
But I actually do understand why people want to risk everything. I understand that they’ve grown up in the most prosperous of times, and they’ve been allowed to make mistakes and get away with it.
Unfortunately, that’s not the environment that we’re coming into. We’re coming into an environment where if you make mistakes, you will be punished.
And the point I’m trying to make here is that you should avoid those mistakes, and focusing on yield is a pretty basic way of doing that.
If you look at the hundred of years of investing and look at what we were doing here in Melbourne or in Sydney in the last 10 years by investing with a 3.5% yield, all of history will be laughing at it. It’s just stupid. We have to stop it.
Personally, I am for a 5% yield, which is a long-term average profit.
3. Apartment vs Buying a House
Number three is about my take on buying an apartment versus buying a house.
If you understand property investing, you understand that you can claim depreciation on buildings these days. This may sound very appealing to investors, but I’d like to emphasize that buildings depreciate in value.
Depreciation is the deterioration of an asset’s value as time goes on, owing to wear and tear. So if the building’s value is going down, nothing in the property is appreciating.
So, I don’t understand from that point of view why people want to own apartments, because if you are in an apartment building with a hundred apartments on it and it’s on a thousand square meters of land, that’s only 10 square meters of land, and it’s not very much land.
It’s a very low proportion of land to the actual size of the property you’ve got. So immediately that tells me it’s risky because I’m not earning much land.
The second thing to look at with apartments is that I don’t trust the supply and demand issue. I actually think that we’re in a short supply of apartments in the next five years.
I think we’re going to get great rents in the city, and I think we’re going to get great capital gain, but the reason I don’t trust investing in apartments is that once it becomes favorable again, councils and developers will get together and deal with each other because they both got a lot to gain out of it.
Then you cannot control the supply issue. The point I’m trying to make here is that sure, you could have big upswings over time, but you could also have big down swings where there’s a large amount of oversupplies.
Think about it. If you own an apartment where there’s a hundred in the block and then another 20 buildings come up around it, the ability for you to sell your apartment becomes a lot lower because there is going to be a lot more supply on the market at any given time.
That is why I like land better – it always appreciates in value. It’s versatile. You can improve it. You can build a family home on it. It’s never going to go.
Land is always an asset that you’re going to be able to sell because someone’s going to be able to find use for it. Land is always a good property investment.
4. Choose the right location
Number four on my list is location. Location is very important in property investing.
And as you consider the location, seek those with infrastructure developments in the pipeline.
Infrastructure projects often contribute to economic development, job creation, and productivity.
Whenever there’s a lot of infrastructure coming into an area, it’s going to draw people into that area with skills, and those people with skills are going to earn money because they’re working on these infrastructure projects.
Sooner they got to force the price of housing up, because demands are also going to go up.
So in identifying what makes a good property investment, carefully studying the location and infrastructures is too important.
I understand that everyone has their own unique goals and objectives, and there are always hundreds of options to accomplish anything.
Again, I’m not a financial planner, but those four things I’ve shared from my point of view are from my 15 years of experience in this game.
If you want to discuss your investment portfolio structure or future lending for investment properties, you will need a good mortgage broker like the team here at Will Bell Mortgage Broker.
Feel free to get in touch with us and have a chat today!
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