Macro, not Micro

One of the most common questions I’m asked by prospective buyers is, “Cate – what are the best suburbs?”

“Suburbs for what?”, I ask.

Buyers invariably want insight into the suburb that is going to make them wealthy the fastest. What they are generally asking about is capital growth. However, this is a hard question because, with all good things, something needs to give.

In the case of capital growth, an investor needs to recognise that a strong performing property will most likely exhibit miserable rental returns. For a property with a high Land to Asset Ratio, not only will the rental returns be low, but the quality of tenant could be questionable and the maintenance costs will likely be high. A high Land to Asset Ratio assumes that the vast majority of the value sits in the land, while the dwelling has a diminished, (and sometimes negligible) value.

Not only is rental return, and maintenance costs a challenge for buyers, but purchase price becomes are glaringly obvious limitation for many investors too.

With a high capital growth location comes high land values.

I can reel off great capital growth areas, but for the average investor they are either prohibitive financially at the onset, or too hefty a burden for the household budget when monthly shortfalls and running costs are taken into account.

 When I explain this to wishful prospective investors, I am (more often than not) asked the following question;

“Where are the next ‘up and coming’ areas?”

What they are really asking me for is insight into gentrifying areas that are likely to outperform surrounding areas in the immediate years to come. The interesting thing is; many investors shy away from gentrifying areas because of either a stigma or a fear of higher crime rates. Gentrification is exciting for any investor, but it naturally carries higher risk. If crime rates are higher in an area, they may be concerned about rental vacancies, harsher wear and tear, malicious damage, rent non-payers, increased property manager intervention, tribunal hearings and so on.

The truth is – there is no silver bullet.

Property investing has to be a long game, and asset selection must always stem from a strategy, cashflow and risk profile.

The most frustrating ‘best suburb’ question I am asked relates to postcodes. Prospective investors have access to data and often get excited by a suburb data report or a generalised overview of an area.

One of the biggest mistakes a buyer can make is to follow a blanket piece of data about a suburb and assume that any dwelling, or any street in the so-desired suburb is a good purchase decision. All suburbs are made up of several pockets, many streets, and are impacted by all kinds of positive and negative elements.  Making a purchase decision off the back of a data report is foolish.

As I said to a prospect the other day, “I could find you some horrid pockets in Suburb A, and likewise I could tell you the best streets. I could even point out a not-so-great house in one of the best streets. You have to stop looking at this with a macro viewpoint, and start thinking micro. I’d rather buy in Suburb B’s best street than on a compromised street in Suburb A.”

Many buyers, (both owner-occupiers and investors alike) feel compelled to secure property in a designated suburb in the hope that they are either striking an aspirational goal or securing a ‘better’ future capital growth performer. This is often a mistake and micro-analysis of sale data will show that premium streets in adjacent suburbs outperform compromised streets in more highly regarded, nearby suburbs.

Successful property investment hinges on strategy, cashflow and a firm understanding of personal risk, but more so it boils down to the things we say no to, more than the things we say yes to. Compromise is healthy in some regards, but compromising on a serious issue in an attempt to secure a particular postcode can bite.