Thanks to our new format of interviewing real Australian property investors, and learning from their experiences, we’re starting to develop a great set of tips for all kinds of property investors.
What’s missing though is the link between the tips we’re receiving and the specific investment objectives of individual investors.
What most investors should start with is a “property investment/wealth plan” showing how they can get from Point A (where they are today), to point B (where they want to be tomorrow), in a manner that’s suitable for them.
Once this is established the right properties can then be targeted to achieve their relevant goals.
Investors should beware of any so called property expert or adviser who has a one size fits all approach to investments. If the same glossy magazine gets pulled out for each client, how on earth can this be tailored to the specific requirements of each individual?
The two forms of returns generated from property are cash flow and capital growth (see our post “What makes the better property investment – cash flow or capital growth“).
High capital growth investments are generally more suitable for high income earners (or those with equity in existing properties). This is because these types of investments are negatively geared, which means they cost money to run every year, and higher income earners are the ones who can typically afford this.
High cash flow investments on the hand are generally more suitable for conservative investors or anyone with less disposable income (either lower income earners or anyone wanting to work less or retire).
Below is a list of the common types of residential property investments that are available in Australia. They come from The Armchair Guide to Property Investing which is good book for Australian investors and is available from Amazon.com (see here).
Each strategy is categorised as being either a “capital growth or yield/cash flow strategy”, as well as either a “property or suburb” strategy.
Capital growth strategies – for suburbs
- Blue chip suburbs and best streets. Suburbs near the city with long track records of consistent growth. The idea is to leverage off high incomes.
- Gentrifying suburbs close to the CBD. These suburbs will always be in high demand due to proximity to major capital cities. They are cheaper than blue chip suburbs and popular with young people due to affordability.
- Inner city suburbs and lifestyle locations. Characterised by established amenities like restaurants, bars and beaches. These suburbs attract well educated residents with high disposable incomes.
- Strong neighbouring locations. Gains can be achieved as more people become interested in the suburb due to affordability pressures nearby/elsewhere.
Capital growth strategies – for properties
- As much land (or as many bedrooms) as possible. Large land components are typically where most capital growth comes from. The focus here in on developed investment grade suburbs though, nothing on the outskirts of a city or in new estates.
- Dwellings with strong owner-occupier appeal and a degree of scarcity. These are dwellings usually with character and period charm. They often have high mainstream/owner occupier appeal. Owner occupiers are emotional buyers and may be willing to pay for these types of properties, which increases their value.
- Constructions / renovations. Here the investor makes structural changes to a property to increase its value.
- Basic but reliable properties which have stood the test of time. Properties that are not particularly fancy, and they are often dated but everything is in good condition and they have stood the test of time.
- Older houses or apartments that get a price uplift from newer builds in the area. This is about buying older houses/units in the best location possible for the dollar outlay. The investor buys at a discount to the new flashy houses/units, and they benefit from the artificially inflated median price once the new stock becomes available.
Yield/income strategies – for suburbs
- Areas where rental demand is high – and vacancy rates are low. Higher rental yields can be achieved when rental demand is strong. Metro/regional areas with gross yields of 5%+/6%+ combined with vacancy rates of below 2%/1% are very attractive. This is a popular strategy for everyday Australians because it creates minimal strain on the household budget.
- Areas where rental demand is high – mining towns. Despite being higher risk mining or remote towns offering high salaries to employees can be attractive suburbs to invest in. When the town is booming most people rent rather than buy, which results in strong yields of 7%+. These properties are also cash flow positive from day 1.
- Areas where rental demand is high – due to a higher proportion of low-income earners who can only afford to rent. Rents remain higher because the local demographic struggles breaking into the housing market, so most households are renters.
Yield/income strategies – for properties
- Investments were additional income streams are available from the same site. Any property where a second residence can produce additional income. Many properties have already been built for this, either via a granny flat for ageing parents or a bungalow for older children wanting their own space. Opportunities could also exist via transformations of double story dwellings into two homes. Council/planning approvals are generally not required.
Other investment strategies
- Subdivisions. This involves subdividing land into separate titles. It can allow for new dwellings to be built on the new titles for further income or growth prospects, depending on whether the new properties get sold.
More comprehensive discussions around the risks, costs and challenges associated with each of these strategies can be provided in due course.
Hopefully this gives you a feel though for how to go about targeting relevant investment properties in the context of a tailored investment or wealth plan.
The experiences being shared by our contributors can now also be categorised by the strategies they relate to. So hopefully this adds value to our readers by making what they learn more relevant.
