Investment grade properties are scarce, so how do you find them?
Investment grade properties have the potential for capital growth but they are scarce, so how exactly do you go about finding and securing them?
There are more than 15,000 suburbs in Australia, and at any one time there are around 600,000 house and units for sale.
But be cautious - not every property for sale will make a good investment. Only around 1-2 per cent of properties for sale are what would reasonably be classed as an investment grade property.
What does that mean?
Experts will talk about properties that make excellent investment opportunities as investment grade, which ultimately means these properties have attributes that allow for wealth creation.
In comparison to other properties, investment grade properties will have the potential for capital growth. Investment grade properties may also have other excellent attributes compared with other properties on the market such as scarcity, desirability, location, affordability, or size/type.
What makes an investment grade property?
Approximately 20 per cent of Australian households own an investment property, but not all these properties allow for wealth creation.
An investment grade property should have the following attributes:
Potential for capital growth: The capital growth of a property will ultimately create wealth. Look for properties in areas that have the potential for capital growth, and are not at the peak of their cycle.
These areas will have multiple growth drivers (such as multiple industries for employment), as well as new schools, hospitals and shopping precincts.
Also look at Government spending on infrastructure such as new roads, highways, bridges or even sporting stadiums. All these infrastructure improvements will increase the liveability of the location and the desirability for migration into the location, which will ultimately push the demand higher than supply and create capital growth.
Scarcity: You want your property to stand out so that it is worth more when it comes time to re-value or sell.
This is because you want the demand for your property to outweigh the supply, which will result in getting the top dollar for your property. Look to buy apartments in smaller complexes and steer away from houses in new estate that often have cookie-cutter designs.
Properties located in areas where land is scarce will make a good investment and push the prices up.
Convenience: Look for properties that are in a good proximity to local amenities and transport.
Access to public transport, schools, shops, and restaurants, as well as located on a quiet leafy street away from the busy roads, will make your property more appealing to potential tenants or future buyers.
Quality: Look at a property’s individual features and ensure you are paying the right price for the quality of the asset you are purchasing.
It is OK to buy a ‘renovators dream’ but ensure you pay the right price and are not paying a similar price to a neighbouring property that already has all the top specs, as this will only limit the profit to be made on the property.
Gearing: For an investment grade property, you would need to ensure the gearing of the property is right for your strategy.
Positively geared properties will essentially pay for themselves and you shouldn’t need to be contributing your own hard- earned cash to cover the costs of holding the property. Negative gearing can be the right strategy for some investors who are targeting strong capital growth only (for example, properties in the middle of capital cities are likely to be negatively geared but will have excellent growth in the long term).
How to find an investment grade property?
Research: It is important to perform due diligence around the location and property. For location, it is important to avoid flight paths, train lines, as well as areas with high levels of government public housing. Also check what the future planned infrastructure is for the area. This can be found on the local council website.
Check whether the property is actually in an area that is planned for a new major highway, train station, or new airport, which could be detrimental to the future value of the property
Strategy: Only look for properties that fulfil your investment strategy. Create a checklist of property attributes (size, type, location, etc.) and only consider properties that have these attributes.
Capital growth: One of the most important factors for wealth creation is capital growth.
To find an area that is ripe for capital growth take a look at what is around the area, such as amenities, schools, hospitals, tourism and employment industries.
Research the development potential in the area as well as if there is any expected population growth anticipated.
One of the biggest mistakes investors commonly make is to buy into an area that has been labelled as a boom town but they are far too late and buy at the top of the market.
Rental income: The rental income of the property, or cash flow, will help to keep your property running. For an investment grade property, you will want to look for a property that has been consistently rented and located in an area that has high rental demand. It is crucial to buy the right type of property for the area and for the demographic to ensure consistent and reliable cash flow.
Type of property: Not all properties are equal. It isn’t about getting the biggest property you can afford in an area, rather you need to buy the right property for the typical person living in the area.
Do your due diligence to uncover the demographics of the location and determine if the area is popular for families, downsizers, couples with pets, or popular for singles (perhaps university students, or short-term tenants).
Buying the right sized property for the area will ensure it is consistently tenanted, as well as increase in value over time due to the demand and supply.