Investing Property

Secret Formula: Buying Investment Property

0
W e all know buying well in the property game is all about location, location, location.

In this short article, I will demonstrate that this mantra speaks for itself and when it comes making a decision to buy an investment property.

Put simply location is the only ‘rule’ that matters and there is a secret formula you need to apply.

There is an underlying viewpoint in the property game that an investor can override the golden rule of location. We are taught to believe that a successful property investor simply buys a rundown property, spends a few weekends at Bunnings, applies some elbow grease and then sells the finished product for a huge profit.

Unfortunately this is nothing more than a dream, concocted by real estate agents and marketers to sell more product.

As investors we are not interested in fantasy, we are interested in the dollars and cents. In other words we want a return on our investment and the larger the return the happier we are.

You only have to analyse the historical returns of the much-loved television series ‘The Block’ to realise that renovation is not the money-spinner we are led to believe. This is not to detract from the end results for many of the properties, but at the end of the day the investment returns from The Block speak for themselves.

Some contestants have done well, while others came away from a few months of very intense ‘work’ with nothing to show for it.

The common theme being that a great renovation does not automatically result in great investment returns.

Put simply ‘The Block’ is a property loss leader, the producers of the TV show are happy to lose money on property
 because they can make money on advertising. Unless you can do the same, I would caution you from following their lead.

When it comes to making money in property you will find that the location, location, location mantra speaks for itself.

We can also learn so much from what the golden rule doesn’t say:

  • it doesn’t say location, number of bathrooms and quality of paint job;
  • it doesn’t say location, new kitchen, lock up garage;
  • it certainly doesn’t say renovator’s delight, diamond in the rough, a few weekends at Bunnings is all it will take.

I think I have made my point.

What Drives Investment Returns in Property?

To make money in property you need to buy something for X and sell it to someone else for greater than X. This is known as price growth and if you can achieve it, you are a property investor.

I like Terry Ryder’s very simple but very informative formula for identifying areas of potential property price growth:

affordability + infrastructure + jobs = price growth

We will examine each of these factors in turn. I would certainly encourage  you take these factors into account before you buy an investment property.

Affordability

Put simply the more affordable an area the larger the potential market of buyers.

In economic terms, this is known as the demand curve, from the supply and demand equation.

The demand curve tells us that the lower the price of property the higher the expected demand.

Demand Curve

Being cheap does not mean a property will be a good candidate for price growth as other factors need to be taken into consideration.

Infrastructure

The key elements to consider are transport, education and medical infrastructure.

Put simply, this covers the aspects that make that area an attractive place to live.

Ask yourself the following questions?

  • Does the area have a transport link (like a train link) that means to you travel easily into the CBD?
  • How far is it away from the airport?
  • Does the area have good schools and universities?
  • Does the area have good medical facilities and hospitals?

These infrastructure factors give a location a unique selling proposition because things like good schools, transport link and hospitals cannot be replicated overnight.

The value for the property buyer comes from identifying these infrastructure developments in their planning stages and buying in that location before everyone else has cottoned on.

This brings us to the next factor of price growth.

Jobs

Put simply, we all need a job. After all that is how we pay for things including our property.

The average person, assuming they live to the age of 80 years, will spend 20% of their waking life at work. This is a staggering statistic, so it makes sense that people do not want to add to this by having to commute for hours each day just to get to and from work.

Once again we have to highlight how important infrastructure is in this overall equation. Good infrastructure usually translates into economic activity, which means (you guessed it) jobs.

Think about it, there are more jobs in the CBD than in a country town, because there are more people, more people means more infrastructure and more infrastructure means more economic growth, which means more jobs.

Jobs are one of the last cogs in a much larger cycle and, for most businesses, employees are their largest single cost. A business will only hire more people when they are confident about the outlook for their operation.

The Government can attempt to do things to stimulate growth, but for the most part, we are subject to the swings and roundabouts of the global economic cycle.

Summary

  • To be a successful investor in property you need price growth.
  • You cannot control the sale price, this is determined by the market (other buyers), you can however control the buying decision (i.e the price you pay when you buy).
  • To buy well you need to follow the ‘golden rule’ location, location, location.
  • To identify the best location you need to consider the secret formula of affordability, infrastructure and jobs.
  • If you follow the golden rule and buy well, you will increase your chances of a successful investment.

The Wealth Guy Signature 

Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you.
You may also like
INFOGRAPHIC: Warren Buffett’s Rules of Wealth: Investment Losses
INFOGRAPHIC: 5 Ways to Make Money in Property Investment

Leave Your Comment

Your Comment*

Your Name*
Your Webpage

17 − 11 =

Logo Header Menu
My title page contents