This is a big subject and there are many, many books written about it. In the interests of simplification, we’ve summarized some of the key points here that many successful property investors agree on.
Side note: The key term here is *successful property investors*. This may or may not include the real estate agents and/or property investment salespeople that are offering you an opportunity. Next time you examine a property investment that is being marketed to you, ask the salesperson how many properties they own themselves. Their answer is often very interesting.
Buying an investment property is not like buying your home, because you have an emotional attachment to your home.
You buy in an area you want to live, and a house that suits your individual taste. The purchase of an investment property should be based on investment fundamentals. You want your investment property to appeal to the rental market now, and then to a large number of future home buyers.
A residential property investment should have the following fundamentals:
- The location should have strong population growth, a diverse range of employment opportunities, current and planned government and private sector infrastructure spending, and be located on good transport routes.
- There should be schools, public transport, shopping facilities, entertainment facilities in close proximity
- The property should suit the demographic. i.e. if the local residents are families, it should be a 4 bedroom house
- Buy on or below the median price. Every city and state of Australia has a median house value. This is the value you should look to invest at or under. The reason for that is it represents the largest section of the rental and buyers market. If your rent and sale price is at market value, you should have an excellent chance of attracting both tenants and buyers.
Land grows in value while buildings depreciate over time. This is why it’s widely held that house’s are generally a better investment than units.
The long term average for homes across Australia for the past 60yrs is 10% per annum. For unit it is 7%, but this is not a true reflection, as its based on median unit values in any given area.
So if you look at a typical area, say Potts Point in Sydney, there may be 20 old units for sale at $300,000, and 20 brand new units for sale for $600,000. The median value would then be $450,000. Growth is measured in median values, so average unit growth is distorted. House growth however is distorted in the other direction, as over time houses are sold, land is subdivided, and new homes or units at higher values are built.
So the land actually grows at a higher rate than 10% per annum on average. Even if the growth rate for units was 7%, 3% compound growth also makes a huge difference over 10yrs. A house also has less holding costs, due to not paying strata fees. For these reasons, in most cases a house is a better investment that a unit.
There will always be the possibility to keep building units, but when an area runs out of land, you cannot produce more.