Buying the most appealing property rarely delivers the most impressive returns for investors, explains Richard Sheppard.
Many investors make two key errors when choosing a property – one, going for the most glamorous house or apartment, and two, failing to do their homework on their property advisors.
Let’s consider these mistakes. Yes, it is natural to want to buy the most impressive property in the best location, for example a lovely beachside apartment with views and a pool. However, it will seldom deliver the best return on your investment.
The aim is to buy at the right price point and to remember the size of your deposit will determine success or failure. For example, say you buy an apartment for $500,000 with a five per cent deposit and get 10 per cent capital growth when you revalue or sell – that represents a 200 per cent gross return on the investment. Contrast this with putting down a 20 per cent deposit and getting 10 per cent capital growth for a comparatively modest 50 per cent gross return.
A large deposit and high purchase price also diminishes your ability to diversify – at a lower price point you may be able to buy two properties or use some of the excess cash for a buffer and/or other asset classes such as shares.
After strategy and leverage, the million-dollar question is which city to buy in. Did you know that every other Australian capital city has grown by between 20 per cent and 120 per cent more than Sydney in the past 10 years? For a $500,000 property, that is $100,000 to $600,000 more growth on just one property.
This proves that short to medium-term growth is far more important than longer-term growth as most cities’ 20-year growth does not vary much, but the two to 10-year growth varies by an extraordinary amount. This can create significantly more equity to then buy in the next growth city. Buying in different states also helps to avoid land tax, a factor that can more than double the cost of owning property.
Being close to shops, schools, parks and transport really adds value. In fact, a new measure called a ‘walk score’ – ranking a property based on its proximity to key amenities – is now being used to help determine good buys from the poor buys. Finding such areas is not easy, but with the help of a reputable property advisor you can maximise your chances of success.
The second crucial mistake many investors make is selecting the wrong advisor. Just as you should do your homework on a particular property before you buy, it is important to select an experienced advisor who has access to independent and high-grade property economics.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.