Whilst many property investors recognise the importance of location in determining the growth potential of their investment, an overwhelming number of buyers will still look to purchase investment properties in areas they are familiar with.
‘Buying in the backyard’ may seem like the smarter investment decision. After all, having a strong existing knowledge of the local area and its amenities can make the research process seem a lot less daunting and time-consuming
However, limiting property research to familiar and often small areas often won’t enable investors to take advantage of the best and most lucrative investment opportunities. For this reason, many professional property investors tend to favour a different approach.
Rather than limiting their research to just a few suburbs, savvy investors will instead broaden their search to larger areas to identify the highest potential State (or even country) before following a top-down method to narrow their research down to an individual suburb, street and eventually a property.
As opposed to the limited approach taken by many buyers, this strategy can enable investors to take advantage of different market cycles to identify the areas with the best prospects for growth, and often higher potential for profit.
Investors taking the top-down approach will generally start by looking at broader macro-economic factors to determine the State, region or even country with the highest investment potential.
This generally involves looking at broader social and economic trends that might impact the property market such as rising population growth, consumer confidence (often in the form of wage growth), the performance of a State’s major industries (for instance, the resources sector for WA), and unemployment levels.
Investors will often also consider any governmental policies or industry regulations that might impact appetite for property or access to funding. For instance, are there any subsidies or incentives in place to help buyers into the market? Or equally, are there any restrictions to investor lending that are hindering people from being able to access finance?
Essentially, this macro-economic approach enables investors to look at the bigger economic picture to identify areas that are primed for future growth. Professional investors will often look to invest counter-cyclically. In other words, they will look for areas that are at the bottom of their economic/property cycle or in early stages of recovery so they can capitalise on the next growth cycle.
Suburb/Local Government Area
As investors move their research from State-level to individual suburbs or government areas, they will start to focus more on micro-factors. These factors will often have a more immediate impact on property values, and might include performance indicators such as days on market for the suburb, supply factors (including oncoming supply from new developments or re-sale of existing properties), rental yields, and future infrastructure upgrades that could impact the development potential of the surrounding area or indicate a future growth in demand.
This micro-approach can help investors avoid the often misleading “median price growth” of a wider region to identify specific areas that are well positioned to outperform the broader market – something which is especially important in a recovering market when demand and supply factors often differ quite vastly between different areas.
Even within an individual suburb, different streets and pockets can often vary significantly in performance. One of the most common examples of this are properties that are situated on busy roads, which will often transact at a lower price point than similar assets located on quieter streets in a similar area.
Once they’ve narrowed down their research to a single suburb or government area, savvy investors will therefore also look at the micro-factors impacting individual pockets within these to identify a more specific area for investment.
This will often involve looking at lifestyle factors that drive demand for properties such as proximity to transport, shops and amenity. However, factors such as the quality of housing and streetscape can also have a significant impact on surrounding property values, and will often go a long way in generating demand for housing as well as tenant appeal.
The final thing investors will look at with the top-down approach is the individual property itself. There are many different factors investors will consider here, some of which will be determined by their own needs and strategy. One prevailing factor is the property type – does the property align to the target market for that suburb? For instance, if a suburb has a large student population, this demographic may favour low maintenance properties in close proximity to public transport. On the other hand, tenants and prospective buyers in a family-orientated suburb may pay a premium for properties with more space and additional bedrooms.
Another important factor to consider is the supply of that specific property type in the region. If a property type is already oversupplied and there is a lot of similar stock in the area, this is likely to impact the re-sale value of the asset.
Often, the suitability of the property will also come down to the investor’s individual strategy. For instance, whilst there may be rental benefits to having a feature such as a pool, this same feature could also be problematic if an investor is looking for a property with development potential. Similarly, if an investor is looking to develop, a property on a corner block could have greater potential than a property with a single street front due to differences in zoning and planning policies.
Don’t limit your investment opportunities
Property research is one of the most important factors that drives success in property investment, but taking the right approach is critical to identifying the highest potential opportunities. As tempting as it may be to limit your search to areas that you’re familiar with, it’s important that this doesn’t come at the expense of better opportunities elsewhere.
At Momentum Wealth, our buyer’s agents are supported by expert market insights from our dedicated in-house research team. This enables us to monitor the entire market for the highest potential opportunities, ensuring our clients can benefit from a superior advantage in the property selection process. To find out more about our research processes or to speak to a member of our team about an upcoming investment, organise an obligation-free consultation today with one of our property specialists.