Many property investors subscribe to the notion that the best investments are close to capital city CBDs – but it may be time to update your parameters.
Blogger: Victor Kumar, Right Property Group
I often talk about property goals and how, if they are not set correctly, they can end up costing you money.
Three things need to be identified to set up property investment goals while avoiding losses:
1. The income goal you are aiming for, in terms of passive income
2. The time frame you are allowing yourself to reach this goal
3. How much of your cash flow you can afford to set aside to help hold your portfolio in the initial stages without negatively affecting your lifestyle
Now you have this worked out, you need to decide what fundamentals you will look for in an area so you can move quickly once you find an opportunity.
If you have attended one of those basic “seminars” – where developer stock is simply being off-loaded in the guise of education – the catch-cry is invest within a five- to 10-kilometre radius of the capital cities’ CBDs.
While this concept continues to work for some people, the definition of CBD has definitely changed over the years with decentralisation, the ability of people to work from home and the preference of manufacturers and businesses to remain in the suburbs, where rent is cheaper and logistics are easier.
Savvy property investors should identify these employment and manufacturing hubs, mentally categorise these areas as “central business districts” then apply the radius theory – rather than just focusing on properties between five and 10 kilometres of the 2000 postcode in Sydney, for example. Indeed, it doesn’t always have to be a five- to 10-kilometre radius: each hub has its own constraints, which will need to be identified.
Once you have done that, you then need to search for price points. As an example, if new two-bedroom units are selling for $350,000, it may pay to search for comparable, much older established units within a certain radius of this development, for a minimum of $100,000 less. This will allow you to get some more surety in terms of growth and you will be helped along by the more conventional fundamentals, such as infrastructure.
You also need to take a pessimistic view in terms of potential rental yields, so that there are no rude surprises in the end. Also, if you do have to renovate, do so with your tenant in mind.
You also need to think in terms of the worst-case scenario, where you have to off-load your property really quickly. There should be at least three to five real estate agencies servicing the area, with offices within reasonable distance of your property. You should also look at the worst case in terms of turnaround times for selling. If more than 70 per cent of the properties take more than 180 days to sell in that area, you need to factor that into your plan.
Once you have sorted these fundamentals, you can use this template to check the investment viability of the area. Once an area passes this test, you then can start greater micro research within the area.