Ideally, you want to choose an investment property that stands the test of time and passes owner-occupier scrutiny.
This is the best way to achieve both consistent rental AND capital growth – and getting both macro and micro factors right will underpin your property’s long-term performance.
We use a macro identification process to find areas where we believe capital growth is primed for wealth creation. We then use our Investment Review Criteria to assess micro factors of individual addresses and properties to identify what we believe is the best investment choice.
We believe that to best manage long-term performance, property generally needs to be held for a minimum of 7-10 years to ride out market bumps along the way, as global and local instability are often due to large-scale events outside of our control (for instance, fire, flood, pandemics, government policy/debt and war).
The process for selecting these properties starts with the build:
Developer / Builder
No matter if the property is brand new or 30 years old, if it has been built by a reputable builder and developer then it is likely to stand the test of time.
Your developer/builder selection is critical for delivery, design, and structural integrity. It’s best to choose someone with significant experience to avoid common design and build mistakes.
We can help you identify properties built by reputable builders and developers.
Macro factors are major underlying components in a large area (state, city and region) that help identify broad areas that hold potential for investment.
As investors, we are looking for areas where demand exceeds supply. Basic economics holds that when demand exceeds supply, we see prices increase – translating to capital growth.
Macro factors can be broken into demand and supply, and can be summarised below:
● Population Growth
● Infrastructure Investment
● Employment & Education Growth
● Supply of new housing
People need to live in homes; therefore to determine if a particular home is a good investment, we need to look at population growth and see if there’s growth in the number of people wanting to live in the area.
Local, interstate, and overseas migration all contribute to population growth. This in turn is likely to increase demand for property across the board.
Furthermore, the types of people and how they live also identifies what type of housing they will require. If an area is forecasting an increase in families (typically 3 or more people), for example, then one-bedroom apartments generally won’t be in high demand as they don’t meet the population’s needs.
Through our superior research capabilities, however, we can identify which pockets of property in suburbs are most likely to benefit from population growth, and the corresponding housing types that will be in demand.
Federal and State governments have bodies dedicated to forecasting future population growth and where people will live. This is because the governments need to provide basic roads, public transport, schools and hospitals to cater for this population.
Naturally, people are attracted to areas with excellent infrastructure as they’ll enjoy a greater quality of life. So when assessing areas to invest, analyse the infrastructure in the area versus alternative options, as this will generally correspond to higher levels of demand.
For new properties, an excellent way to get a head start on your research is to identify new infrastructure planned by the governments.
Wherever there is a high amount of investment planned for infrastructure, there is a high chance that the government is planning for significant population growth.
Not to mention that historically the greatest capital growth has come to those early adopters that saw the vision for the area, and invested before the infrastructure was built and the population growth picked up in pace.
Employment and education
Chances are you’re currently working or studying; think about how long your current commute is. It’s very unlikely for someone to live 2+ hours from where they work or study every day, which is why employment and education centres are good indicators for housing demand.
Whilst COVID may have slightly changed this trend in the short term, people are social creatures that need face-to-face contact in order to thrive and any work-from-home arrangements will likely be temporary in nature.
So looking for established job centres (like CBDs or manufacturing centres) and education centres (such as universities and TAFE) is a good indication of higher levels of demand.
Similar to infrastructure planning, governments also plan for employment and education centres, so future employment and education centres are good indicators of population growth and demand.
So now we know about the three demand-led macro factors (population growth, infrastructure and employment & education); however, these factors aren’t worth considering until we take supply into account.
Supply is the increase in new homes in an area. If supply can’t keep up with demand, then we tend to see increased price growth. Whilst we might identify areas that have the best demand-led macro factors, if the supply of housing is greater than the demand then capital growth will typically be lower.
This is especially true for inner capital city apartment markets: although they might have huge amounts of population growth and spending in infrastructure and employment, large supplies of apartment complexes tend to keep prices subdued.
This comes back to one of our principles: creating wealth through owning land. Once an area is developed for houses and townhouses, there is no physical ability to add more land for development – as opposed to apartment locations, where the sky is effectively the limit.
So, now you’ve found an area that is primed for capital growth, how do you assess the individual properties to find the best one for investment?
Remember, a macro area may have tens of thousands of properties within it – and no two properties are the same. That’s when we assess the micro factors of the individual properties and rank them according to those best suitable for investment.
Our investment review process takes over 100 micro factors into consideration when assessing a property for assessment.
Like your favourite cola or fried chicken, we can’t share all our secrets with you, but these are some of the factors to look for when making your own assessment:
Land Value Ratio
What proportion of the price of the property is the land value? If it is a high proportion, capital growth rates are usually higher.
Is the design of the property efficient? Designs that are livable tend to outperform poorer designed properties.
How does the quality of the property compare to other properties in the area? Does it meet the demands of owner occupiers?
Is the property located at an address that has convenient access to essential infrastructure and education?
Is the property well designed to take advantage of natural light and heating and cooling? Sustainable properties minimise the need for air-conditioning and lighting, thus reducing operating costs over time.
Remember cash flow? It was one of the basics we learnt about in The Financial Basics of Property.
So once we have narrowed down our options to several properties, we need to work out which will be best financially. Assessing a property’s cash flow is important to ensure it fits in with your overall portfolio strategy and that you have the ability to hold the property over time.
But it’s not just today’s cash flow that’s important to look at; what will your cash flow look like in several years time? Interest rates could be higher, so it’s necessary to factor in an increase in mortgage repayments to make sure you can hold the investment and maximise your capital growth potential over time.
Ultimately, planning for a passive income from your rental return for when you’re no longer working is critical for a balanced retirement income.
To improve cash flow, I have many suggestions to help you along your journey. Some of these involve:
● Having an offset account to act as a buffer for life’s unexpected bills.
● Paying more off your mortgage only when you can, to create a neutral or positive cash flow. This is especially important as you near retirement or seek to buy your next property.
● Negative gearing is also an option, where government incentives such as depreciation help reduce your taxable income and thereby provide cash flow support.
Ok, so after all of the above you’ve now found the perfect investment – fantastic! But is it worth the price?
Warren Buffet famously explained the difference between value and price: ‘Price is what you pay; value is what you get’.
By assessing comparable properties in the market to determine an average price, you can assess what a fair value for the property is. If purchasing at a price at or below your determined value, chances are you are getting a good deal and accelerating your wealth creation journey. But if this all sounds too hard, an independent valuer can help you at a cost.
So there you have it – a structured process to select an investment, no matter where in the world that investment may be.
Sound complicated? You’re not alone. There is a reason people dedicate their working lives to investment selection. We’re here to help and do the hard work for you!
Ideally, you want to choose an investment property that stands the test of time and passes owner-occupier scrutiny to achieve both consistent rental AND capital growth. Consider these macro and micro factors and you’ll ensure your property’s long-term performance.
This marketing material and its contents is provided for general information purposes only. No part of this marketing material constitutes any advice (financial, tax or otherwise), recommendation or representation to you as to any decision which you should make. You should not use any part of this marketing material to form the basis of any investment decision made by you. Before making any investment decision, you should take independent advice from a professional adviser which takes into account your individual needs and circumstances. All information, opinions and estimates contained in this marketing material are subject to change without notice. We disclaim to the greatest extent possible all liability whatsoever for any loss howsoever arising directly or indirectly from this marketing material or its contents.