How to choose an investment property

as published in domain.com.au by Daniel Butkovich

Depending on your investment goals, it’s possible to find a suitable property in many cities and towns around Australia. 

The type of property, location, suburb and price point that is right for you will depend on your strategy. It’s worth thinking broadly about what you aim to achieve by investing, whether it’s long-term wealth creation, a passive income, a retirement strategy, or a combination of these.

Properties with strong long-term growth prospects tend to have certain features in common. Not every good investment property will have all these features, and not every feature is necessarily applicable, but these fundamentals will give you a general idea of what to look for.

Investment property fundamentals

Investors should look for properties that will increase in value over time and provide strong rental returns. While this sounds straightforward in theory, in practice it’s often difficult to achieve both, as properties with high capital growth often have low rental yields, and properties with high rental yields often have low capital growth. However, there are certain signs to look for in an investment to maximise your chances of a strong return.

Location

This is arguably the No.1 factor to consider when looking for an investment property, and most property experts tend to agree that a property’s location has the greatest effect on its value in the long term.

In general, land values tend to increase over time. This is because land is a finite resource – there is a limited amount of land available for occupation at any given time.

On the other hand, the population tends to increase over time. Unless new land is released by governments or developers, increased demand from the rising population pushes prices up. This applies not only to property values, but also to rents.

Employment

While some areas are more desirable to live in than others due to lifestyle factors, one of the biggest factors that affect an area’s desirability is its proximity to employment. Areas close to employment hubs are highly sought-after, as people generally prefer to live close to where they work to minimise the amount of time they have to travel each day. 

A simple example is the central business district of a capital city. Inner suburbs tend to have much higher land values per square metre than outer suburbs, because these areas are only a short distance from the highest concentration of jobs.

The type of employment is also key. Major cities have a diverse range of employers, which is desirable to a wide range of people. Major cities also have the highest concentration of high-paying industries, such as financial services, information technology and construction. When people are earning a high income, they can afford to borrow more to buy property, or pay higher rents. When there is competition for desirable homes, this pushes up values.

Some towns or cities may lack a diversity of employment options, and may be dominated by a single industry, such as mining, manufacturing, agriculture or tourism. This creates a risk, as a town’s desirability can change dramatically if a major employer closes or if the local economy suffers. 

On the other hand, if a major employer or industry opens up in a small town, it can create a property boom as people flock to the area in search of employment. With a limited number of properties available, this influx of people puts upward pressure on prices. Mining towns are a key example of this phenomenon, and it’s also common in areas that suddenly become tourism hotspots.

Transport connections

An area doesn’t necessarily need to be right next to an employment hub to be desirable, because access goes hand in hand with proximity.

An area with good transport links to an employment hub, including public transport and freeways, allows people to get to work quickly, even if they live many kilometres from their job.

Upcoming infrastructure projects can further enhance the desirability of a suburb, especially if the area was previously lacking in transport options.