I am guilty of it, and I’m sure you are too. Hoping that by going to a seminar on property investing or reading the latest money magazine on the shelf; that I will somehow miraculously be given the tools I need to find a property in the next “boom” suburb.
The media often tells us that a certain area is going to be the next best suburb to invest in but in reality by the time the media has become aware that the area is experiencing enormous growth, the developers and savvy investors have already swooped in.
Why? Because the developers and savvy investors know where to invest before everyone else does.
I have read a lot about property investing over the years, attended countless seminars and even worked in real estate. When you ask people in the industry what is the best investment strategy they will always tell you: invest in blue chip real estate. It never fails. Now for those of you who don’t know what blue chip real estate is, it is basically buying property in the best suburbs, think high-end value, close to the city, water views etc. The problem with this strategy is that the average person cannot buy into this market. Not to mention the fact that it is most likely heavily negatively geared (if you live in a country that endorses negative gearing), so unless you have sufficient cash flow to cover your losses, buying these kinds of investment properties are going to prove extremely stressful on your bank balance, regardless of the tax breaks you receive. You should never over extend yourself, even if it is for a good long-term investment.
Before I move onto the 3 tips I have for helping investors choose their next location, I want to make sure that those reading this entry understand the concept of negative gearing.
Negative gearing (and note this is not endorsed by all countries) is when an investor can claim any losses he/she makes on a property over the course of a financial year. What you can claim will be explored in future blogs, however for the purpose of this example, all you need to know is this: when you purchase a property as an investment and the rental income does not cover the costs of the interest on the mortgage then you can claim these losses (and all other costs) against your taxable income. This is a strategy often implemented by the rich to reduce their tax bill every year.
-The 3 Tips to choosing an investment location-
The 3 tips that I have outlined below are not investment locations on a platter. There is no “easy way” when it comes to investing; it will take time and plenty of research to find a suburb (and ultimately a property) that will give you good long term gains. However, these tips will point you in the right direction and give you a good solid foundation when it comes to trying to find the right location to invest in.
Tip #1 – Government Spending
The first tip when trying to locate a suitable suburb for investment is to determine where the government is currently spending money. This could be state or federal spending, obviously the more the better. When the government starts spending money in a particular area, whether it is on roads, public transport or schools, you can bet that that area has already started to experience significant growth. As we all know, the government is not going to spend money unless they believe they will get a return on their investment (not that dissimilar to you and I). Remember, with the population growing at a rapid rate, the government is encouraging housing density not only to offset the shortages of land but also because it means more money in their pockets due to an increase in households paying council rates. You can find information on proposed and current infrastructure projects etc on the state and government websites. In particular look at the chamber of commerce and infrastructure websites.
Tip #2 – Private Industry
The second tip is to look at where private industry is moving. If the suburb you are looking at investing in has had an influx of private industry this is always a good sign. This could be anything from a Westfield to a Woolworths. This will be a strong indicator of jobs and money coming into the area which will inevitably mean further growth and more demand for property. You can find this information on your council websites by looking at developments that have recently been approved.
Tip #3 – Demographics
The third tip is to study the demographics of the area. What is the average age of the people that live in the area? Are they mainly homeowners or renters? What is the median household income? Can they afford the type of investment property/development you want to do in that particular area? And in particular what is the rate of growth in the area? You can find this information on the Australian Bureau of Statistics website.
If you have picked a suburb that can tick all three of these boxes i.e. government spending, private industry developments, and population growth, then chances are you have picked a great suburb to invest in.
The next challenge is then creating a checklist to determine what kind of property you will buy in that suburb. This will be the subject of future blogs, so stay tuned.