‘Location, location, location!’ There’s a reason why this is the first rule of property investing.
1. Consistent population growth
To make money, investors need to be certain that there will be demand for their properties. Whether you’re investing for income or for capital gains, or both, you’re going to need people at the location who want to rent or buy properties there.
Throughout the country’s history, Australia has been consistently adding people through natural growth and immigration. This is particularly the case for the capital cities, where residents both new and old typically flock to.
2. Proximity to employment centres
Population growth almost always comes with job growth. If not, this growth may not be sustainable. As soon as the job market dries up, people could relocate.
If you invest in a residential property that’s within an employment hub, for instance, it’s going to appeal to workers who want to rent or buy in the area. Such properties are most likely going to be costly. New investors may not be able to afford them, or they may bite off more than they can chew. If this is the case, you may want to look for a property in a nearby suburb. Or, you may put a little more work into finding an area with a job market that is about to explode.
3. Limited supply compared to demand
Basic economics dictates that more supply, with respect to demand, will put downward pressure on prices. And when reversed, more demand will put upward pressure on prices. Therefore, if you want to make money, you’d want to invest in an area where demand outstrips supply.
Higher demand will almost always result in higher rental and sale prices for your investment property. However, there isn’t any data that directly says “supply” or “demand”. You’ll have to draw a conclusion from other market data. For example, population growth would indicate higher demand. So would high auction clearance rates, or rising property prices.
4. Sought-after neighbourhood
Everyone has their own opinion of what a good neighbourhood should look like. Still, there are a few characteristics that appeal to all. The first is accessibility. The neighbourhood should have connections to the city’s major highways and more than one entry point. Otherwise, the morning and evening commute could be such a headache that people wouldn’t want to live there. That’s also true of the presence or absence of public transport facilities in the area.
Likewise, the neighbourhood’s appearance matters. Attractive landscapes, towering trees, and community spaces may contribute greatly to a neighbourhood’s appeal.
Another way to look at a neighbourhood’s appeal is to assess the length of time that an average house spends on the market. Quick turnover is a good sign, as it suggests that people find the area desirable.
Last but not least, an attractive neighbourhood should have amenities that appeal to residents. These include schools, grocery stores, restaurants, retail spaces, entertainment venues, and more. Preferably, your investment property should be accessible to these amenities.
5. Favourable price-to-rent ratio
The price-to-rent ratio of an area will show you if buying for capital gains or for rental return is the better option. To calculate the ratio, just divide the area’s median house price by the median rent for the year. The typical values for Australia are:
- 1-15 (low)
- 16-20 (relatively high)
- 21 and above (high)
For new investors, it’s generally easier to make money if the ratio is low. If the price is low compared to the rent, it means, right off the bat, you should be able to rent it out at a price that can cover the monthly mortgage payments.
Conversely, if the ratio is high, it may indicate that there are a lot more buyers than renters in the area. You might be able to make more money by flipping houses than renting it out.
The location is one of the most important decisions that you’ll have to make when looking for a property to invest in. Because of this, you should take your time in assessing whether a particular location is conducive to growth or not.
You’re going to want to have all the relevant information before you invest. Join our next free online Masterclass where myself and co-Founder Scott Kuru cover all the strategies we use to pick winning investment properties.
Lianna Pan is one of only 2,997 qualified Actuaries in Australia and is Founder & Director of Research at Freedom Property Investors.