Thorough research is key to success in order to safely and effectively build wealth through property investment.
One of the biggest mistakes people make is believing that any property is a good investment opportunity, because this is absolutely not true. Many people still lean toward investing in the areas they know or feel comfortable with (or where their family or friends advise them) but don’t conduct the necessary research to adequately answer important questions such as, what is the capital growth forecast for this area? or, what is the cash flow of this particular property?
There are literally thousands of different property markets available to invest in within Australia as well as nearly 10 million dwellings, each has its own cycle of fast growth followed by periods of little or no growth. There are many factors that influence these periods of growth and therefore allow us to predict where the next high-growth regions and opportunities will arise, yet, it’s still surprising how many people will invest in many hundreds of thousands of dollars of property, if not millions, without good advice and research.
All property markets have a cycle that is typically about seven years of high growth (often called a boom), where it typically gets about 100 per cent growth. Then, there is usually a 5 to 15 per cent drop in values, followed by about seven years of very poor growth (often called a plateau), of around 0 to 10 per cent.
At the start of the boom, rental returns and affordability are usually quite high, with many properties achieving positive cash flow. However, at the end of the boom, rental returns and affordability are very low, with most properties usually negative cash flow. This is where we find ourselves in Sydney right now with a very similar scenario playing out in Melbourne.
The difference in growth over a seven-year period can be zero to more than 100 per cent, which for a $500,000 property can be a difference in growth of around $500,000 or more. In addition, the rental returns are usually much higher.
So, you must try not to fall into the trap of thinking that your suburb is great, it always has good demand, so it will always do well, because it is simply not the case, even on the amazing Northern Beaches!
From 2017 to 2019, almost all Northern Beaches suburbs dropped in value by about 15 per cent, while also having very low rental returns. However, many other markets grew by 20 per cent or more in the same period, while having net rental returns of 50 to 100 per cent higher, because they were simply at a different point in their respective market cycles.
As an example, over the same period, many Brisbane properties had around 80 per cent growth while the rental returns were substantially higher, and the rent and tax benefits were typically higher than the total costs.
When it comes to finding the best opportunities, a three-tiered research approach is recommended, utilising data at the macro, micro, and property level.
1 | MACROECONOMIC RESEARCH
Macro research looks at the bigger picture of the property market. It covers the whole economy and compares property trends in larger cities including Sydney, Melbourne, and Brisbane. Always start with Macro level research to identify the best major regions to focus on, then adopt more local-level research to drill down into the best sub-regions and suburbs.
2 | MICROECONOMIC RESEARCH
Micro research for property is more about how a particular region, suburb or street performs in the market. Effective microeconomic property research can be a little more difficult to find than macroeconomic data.
3 | PROPERTY-LEVEL RESEARCH
When reviewing potential investment properties, your selection should reflect the appropriateness specific to your individual set of circumstances, budget, goals, and risk profile.
There are great strategies available to invest more effectively and more safely, so look for a good property wealth planner that has access to some great Australia-wide research and the proven track record to help you make these all important decisions. After all, it could be the difference between a very high-performing or very poor-performing property portfolio and perhaps hundreds of thousands of dollars over the longer term.