Smart property investment is about creating long-term wealth.
Put simply, you want the properties you purchase to increase in value as much as possible over time. (Read this article to learn more about why price growth is far more important than rental yield.)
So, what are the key things you need to look for in a investment property in order to achieve the maximum possible asset appreciation over time?
- Nearby Gentrification
- Demand of Design
- Structural Integrity
- Value-Add Opportunities
1. First and foremost, it’s about Location.
Where your property is located (from area > suburb > neighbourhood) will have the most baring on future capital growth. The following are a few specific location characteristics to look for.
Consider the location of Hospitals and Universities. The biggest and fastest growing industries in Victoria are Health and Education. Healthcare professionals like doctors, nurses, surgeons, and specialists, are paid well; they have great job security; and, they are in a growing industry. The same can be said for Education professionals like deans, professors, and researchers. Investing in areas that are popular with Health and Education professionals will pay off in the long-run.
People have always preferred to live close to where they work, and as infrastructure throughout Melbourne fails to keep up with population growth, proximity to work will become increasingly important. A huge proportion of good paying jobs will always be found in the CBD, so think about triangulating Hospitals-Universities-Train Stations when looking for suitable areas.
We’ve covered the importance of state secondary school zones in driving capital growth here. Primary schools are becoming an increasingly important consideration for purchasers. And, of course, don’t limit yourself to just looking at state schools – have a look at Independent and Catholic schooling options as well.
2. Look for widespread Gentrification as a sign of future prospects in the neighbourhood.
I love seeing new developments going up near where I purchase, because that indicates confidence in the area, and suggest strong demand from buyers (why would developers create supply if there weren’t buyers to purchase?).
I particularly like seeing old houses knocked down and replaced by large, single dwellings. When someone knocks down a house and replaces it with one brand new one, they usually overcapitalise (i.e. they spend more on the purchase and build than what they could sell for immediately upon completion). People are only willing to overcapitalise when they plan on being in a property for a long time; and, they only plan on being in a property for a long-time if they love the area, and have confidence in its future.
Beyond that, look for renovations and extensions, new playgrounds and other council projects. Look to see if the local shops are quality and/or improving. Consider whether the neighbours are taking pride in their properties. If the neighbourhood and street feels like it’s on the up, then prices will likely follow.
3. Does the Design of the property you’re considering match the Demand from buyers?
This is where a lot of investors can go wrong…
If the main drawcard in the local area is a very popular secondary school, then the strongest demand will come from young and middle-aged families. So, by extension, 3bed+ houses will be most popular. Then, why are you considering purchasing a modest 2bed 1bath on a small block of land?
If the property is in an affluent area, with a lot of wealthy older people, then chances are that the greatest future demand will come from people looking to downsize and stay in the area. These buyers want quality, and absolutely require a downstairs master bedroom and reasonable living spaces. Then, why are you looking to purchase a poorly renovated property on a sloping block, with all bedrooms upstairs?
Always think about who lives in the area you’re looking at, why they choose to live there, and what they will demand in properties moving forward. This will have a great impact on future capital growth and on rentability.
4. The Structural Integrity of the property is hugely important in avoiding future large-scale expenses.
Look at the condition of the roof, gutters, and downpipes. Get under the house to assess its footings, and look for signs of damp. When walking around inside, look for any water damage on the ceilings, on window frames, and in the corners of bathrooms. Are there signs of structural movement like large cracks in plaster, bouncy or uneven flooring, doors that won’t close properly? How old do the windows look? All of these things can prove incredibly costly to repair, and fixing them won’t necessarily increase the value of the property. Look past the cosmetic changes that may be required, and focus on the structural elements in order to avoid future expense.
5. Smart investors look to Add Value Proactively.
A rule of thumb to follow with renovations: every $1 you spend should increase the value of the property by $3. Would you pay an extra $60k on a property because the owner spent $20k on replacing the roof tiles and gutter works? Not bloody likely. But, would you spend an extra $45k for a new kitchen, with glass splash back, stone bench tops, new oven, stove top, range hood, etc? If updated tastefully, then yes, you probably would.
The best Return on Investment is gained from updating wet areas – kitchen, bathroom, laundry. I’m a big fan of ripping up carpets and polishing the floorboards underneath to give a feel of modernity. A new lick of paint throughout the house freshens things up dramatically. A few overlooked areas that always have a surprisingly big impact on price, at minimum expense: lighting, landscaping, outdoor living, and window coverings (blinds or curtains). Never underestimate the importance of first impressions – improving the streetscape is absolutely mandatory if you’re looking to alter value expectations (from buyers and from the bank). For more on adding value proactively as an investor, read this article.
There’s obviously a lot more to property investment than this, but following the above list will go a long ways to ensuring that your investment property performs well over the long-term.