Do you know how to tell a hotspot from a 'not-spot'? Finding the perfect property investment location for your next purchase isn't as hard as it sounds. Here's how.
Why is location so important?
‘Location, location, location’. It has long been thought that location is everything when it comes to buying property. When choosing a location for your investment property purchase, it is easy to feel overwhelmed by the options, but the most important thing is to know what will work for your own unique circumstances.
Short term, a property’s location will determine your prospective tenant pool. If it’s a blue-chip suburb and close to lifestyle amenities, it will have a large potential tenant pool and the area is unlikely to struggle to attract tenants. If it has limited local facilities, you may face the challenge of having a smaller tenant pool. There are pros and cons for all locations, but choosing the right one begins with coming to terms with your own personal property investment goals.
Long term, property location is important for increases in property values. Investors should be looking at the potential for capital growth in a particular suburb.
Considering your personal circumstances – ask yourself questions
In order to find the right property for your personal circumstances, you need to have a clear brief in place for your property search. Consider asking yourself some questions about location preferences to narrow down the search – questions such as the following:
• Do I want to invest in a city or regional area?
• How important is it for the suburb in which I invest to have growth drivers such as schools, shops, restaurants, cafés and parks?
• Would I feel more comfortable investing in a suburb I am familiar with or will I think more objectively if I purchase somewhere new to me?
• Is it essential for my investment to be positively geared?
• What is my desired rental yield range?
Answering these questions will allow you to look at essential criteria and determine the area in which you will be able to get what you want and still stay within your budget.
Should I buy in a ‘hotspot’?
A property hotspot is best known as an underperforming suburb or region that is forecast to gain buyers’ attention sometime in the near future. Suburbs on the outskirts of more popular areas are generally the ones that become hotspots, since the houses in major lifestyle areas often become too expensive for people to afford. When people are priced out of the more popular suburbs, a ripple effect occurs whereby buyers look to suburbs just out of the lifestyle hubs. They are more affordable but still within a reasonable distance of desirable amenities.
By investing in a property hotspot before it takes off, you can typically purchase for a low price before buyers flock to the area and prices skyrocket.
Investors are sometimes warned not to invest in a ‘hotspot’, however, since it can come with the risk that the suburb is only experiencing growth on the basis of short-term speculation and won’t necessarily provide long-term sustainable capital growth.
However, other property investment experts suggest this is the smartest way to make money in the property market.
To determine what is right for you, it is important to do your due diligence and analyse ‘hotspot’ suburbs as you would any others.
City versus regional property investment
Sometimes beginner investors favour city properties over regional properties since a majority of the population resides in major city areas, seemingly creating higher and more reliable rental demand. In many cases, it’s also easy for less experienced investors to see the capital growth potential of city suburbs due to the shift towards cities and reports of the increasing number of people wanting to buy or rent in blue-chip suburbs.
As a result of steady capital growth in capital cities, inner-city properties are typically negatively geared. Regional properties, on the other hand, are often positively geared, creating positive cash flow for investors.
Regional properties are often seen as more of a high-risk investment since vacancy rates in these areas are usually higher than city properties – dependent on employment and industry circumstances, such as in mining towns. City options are often seen as much less of a risk because there will always be demand for well-located, blue-chip properties.
For many first-time investors, however, regional properties are a lot more achievable, due to their affordability – particularly if they are cash-flow positive.
Buying a ‘property you can drive past’ versus buying interstate
There is a longstanding debate in the property investment world concerning whether it is better to buy a property in an area that you are familiar with – and that you can, literally, drive past – or whether it is better to invest interstate.
There are several benefits of buying in an area that is close to home.
• You are personally familiar with the area and the demographics of the area, and therefore will initially feel more comfortable buying there
• It feels like a more tangible purchase – important to a lot of people when making such a big financial commitment
• You will already have a general idea of local house prices and rental amounts since it is more common to be familiar with the housing market you are directly exposed to
• You can personally inspect each property before making any offers
• You can physically visit the property whenever needed
• You can perform DIY projects and other minor maintenance on the property which will save you having to pay someone to do it
However, by limiting your property search to properties close to home, you may be missing out on the best possible purchase for your personal circumstances.
By considering an interstate investment, you could benefit from a number of other things:
• Opportunity to invest in areas seeing growth or market demand
• If you have limited funds, preventing you from purchasing the property that you want in the city where you live, investing interstate could be the key to your first step onto the property ladder. This is quite often the case for many aspiring investors living in capital cities, where house prices are too high to allow investing close to home
• Objective approach to buying property – it is easier to buy with your head not your heart when you are buying interstate, particularly when you buy site unseen
• Easier to leave the management of the property in your property manager’s hands