Five tips for buying best investment property - hint, it's not just location

Looking to dip your toes in the property pool and pondering, “Where should I buy an investment property?” Well, before I give you a conveniently packaged answer, let’s sit back and address whether it’s the most productive question you should ask.

Most people ask this question because we live in a big country and it’s hard to know where to start. But at the heart of the question is the desire to pick the next market to take-off point.

1. Location, location...wait a minute

You've probably heard it countless times: “Location is everything.” But here’s a twist: it’s not so much about where the property is, but what you buy in that location.

Just as every city has its hidden coffee gems and overrated cafes, every location has properties that outperform and those that underperform.

So, before we jump in, let’s take a deep breath and shatter a common myth: Australian properties doubling in value every ten years.

Well ok, if you look at aggregated data over a long period of time, it does look like the entire Australian property market has gone up around about 8 per cent per annum since records were kept.

So, I hear you say, “It’s not a myth!” And if you were going to buy a share in the entire property market, based on that performance, I’d say, “Go ahead, that’s pretty low risk.”

But that’s not how we invest in property. Most of us choose one property at a time, with nearly three quarters of us never getting beyond that first property.

2. Unpacking the data dichotomy

How can two conflicting property facts both be true simultaneously?

Australian property doubles in value every ten years and yet 7.7 per cent of people who sold a property in the first quarter of 2023 lost money. And of these 5,852 sellers, 21 per cent of them had owned their property for between 8 and 10 years before they realised their loss. This is the truth revealed in CoreLogic’s Pain & Gain Report for the March 2023 quarter.

Data enthusiasts will no doubt dismiss those as outliers given that roughly 76,000 resales were recorded over the period. But what if you were one of those people who lost money? Especially if you were one of the 1,200 or so who had held your property long enough for it to have supposedly doubled?

We also need to understand that growth occurs in cycles and different locations can experience different rates of growth at different times. This of course supports the argument that we should, in fact, be hotspotting.

My concern is the risk. What if the data points you in the wrong direction? What if you get the timing wrong?

3. Timing vs asset selection: what's the real deal?

Imagine you’re trying to photograph a picture-perfect sunset. Timing is essential, right? However, in the property world, having the perfect camera (or asset) often outweighs the timing. Think about it: if you’re banking solely on data for that perfect shot, you might overlook the importance of understanding the capabilities of your equipment.

This, my friend, is the essence of asset selection. Combining insightful market data with local specialisation is akin to having both brilliant lighting and the perfect camera settings on point.

4. Trust and the art of property selection

The least risky way to invest is to choose a location that has a long history of performing well, where quality property will always attract buyers, even in a downturn.

The locations to look for are those where people want to live and where owner occupiers can afford to buy a home. Somewhere aspirational, with lifestyle amenities that attract buyers in both good markets and bad.

And then, spend some time learning about what a quality property looks like in that area. This is not something that can be outsourced unless you’re looking to engage a buyers agent with local expertise.

If you’re thinking of calling up a local property manager to do this on the cheap, beware of the false economy. A property manager is great for finding tenants and managing your investment, but trusting them to choose the property? That’s like asking your barista to mix you a cocktail.

If you’re not willing to put in the time and effort to research the market yourself, you’d be better off with an asset selection specialist. Believe it or not, even many buyers agents have a tough time nailing this aspect. That’s why it’s so important to choose one who can explain to you what an A-grade property looks like in their area.

5. Emotion and data: the investor’s tango

It’s often believed that investors are shrewd, making decisions based on cold hard facts. But the Pain & Gain Report tells a different story. In the first quarter of 2023, investment properties, though a fraction of total resales (28 per cent to be precise), represented more than half of the loss-making sales.

There are a number of reasons behind this somewhat surprising outcome.

For starters, investors buy more units and their hold periods tend to be shorter. But there’s also a lesser known truth; one that is known by local specialists (sales and buyers agents alike) but is difficult to tease out of the data, and that is: while investors might drive up prices in a location or over a given period (think prior to 2016 when APRA stepped in to restrict investor lending), owner occupiers drive up the prices of individual properties that are desirable.

It’s a gentle nudge that perhaps emotions, when coupled with data, might just strike the right balance. This is why asset selection is so important.

The question, “Where should I buy?”, while understandable, is limited in its usefulness. The true magic lies in understanding what you’re buying within a location.

While data can point you in the right direction, local specialisation and understanding market nuances will amplify the decision-making process.

So, next time you’re contemplating “Where should I buy an investment property?”, remember that a thorough asset selection process is key to ensuring you make a wise purchase.