Finding property investments that deliver the full performance that investors need is becoming increasingly difficult – especially in the metro areas of Australia’s key cap city markets.
Soaring property prices in Melbourne, Sydney and Brisbane have pushed inner city purchase prices beyond the reach of many investors. Even those who can afford the entry fee are increasingly nervous about concentrating too much of their portfolio (and their debt) into a single high-cost property.
And while State governments are currently very keen to support the building industry and rental demand is exceptionally high, the recent pandemic has shown us how quickly state economic conditions and government policy can change.
Interstate investing can balance risk
As a result, more and more investors are looking to balance their risk wherever they can; and using geography to spread risk is becoming increasingly popular.
But risk mitigation is only one of the benefits of building a multi-location portfolio.
It’s also about getting the highest outcome – across capital growth, tax benefit and rental income – for the same level of debt. This is considerably easier if you are prepared to cast the net beyond your familiar shores.
And there are good reasons to look beyond your home state. Each state has its own emerging areas, and each of these have different strengths.
Being able to cherry-pick across these areas in different markets gives multi-state investors a level of choice and power for their money – and a huge potential advantage over that local investors.
While the benefits seem obvious, it’s often hard to shift into this multi-location mindset.
We know that moving beyond familiar territory is initially difficult for many investors, especially when you are looking to buy in an unfamiliar state.
Part of this comes down to the way we are trained to think as home buyers. We have been conditioned to think that there is some home-ground advantage in buying close to home – and while this approach may have limited merit when selecting your family home, it can do you a serious disservice when looking to use property for investment.
While it can be unsettling, the fundamentals of assessing an opportunity are very similar in any market.
Here are four road-tested general questions you should consider as you make the move into multi-location investing.
1.What deal type best fits my portfolio right now?
Broadly speaking, there are three different types of deals – house & land, townhouse and apartment, and each contributes to your portfolio in a different way. The first step is to be clear on the type of deal you are looking for. One of the early dangers of an unfamiliar market is being distracted by the range of property opportunities in a new market. Make your deal choice and shop only for the deal type that fits your strategy right now. Don’t get distracted – there’s plenty of time to come back to the market for something else later when it fits your strategy.
2. What areas suit my deal type?
Once you know what deal type you are seeking, start looking at areas in or around cap city CBDs. Real estate portals like realestate.com and Domain can be a useful reference tool for understanding the local landscape.
3.What are each area’s vital signs?
a. Connectivity & Employment
Pay particular attention to the connectivity between your target areas and the CBD, shopping hubs and any major industry in the surrounding areas. Universities, hospitals and industry precincts in the surrounding areas are often good indicators of reliable tenancy demand and a level of government commitment to the area.
b. Rental occupancy levels & return
Look for areas within your shortlist where occupancy is already high. This is a sign that there is strong employment in or around the area and that the current demand exceeds supply. This is especially important for off-market projects. Its also important to know that the rental yield can meet your income / financing goals. As a rule of thumb, Sydney yield is sitting at roughly 3%, in comparison to Melbourne yield sitting at around 4% and Brisbane yield is sitting at 5%.
c. Time, heat and scarcity
What is the clearance rate for properties in your target areas and the broader city market? Clearance is a handy proxy for measuring the confidence of a market – and confidence is what makes prices heat up. A clearance rate of over 70% is generally considered a sign of good market confidence. As markets heat up, the clearance rate starts to shift upward. Most cap city markets currently sit at around 86%, meaning that close to nine in every ten properties put on the market will sell. This is a great sign for capital growth once you are in the market but presents significant dangers for investors looking to enter the area.
Why does this matter? Strong demand drives quick sales and hot markets. Strong clearances are often a recipe for forced errors. Remember that rushed decisions in an unfamiliar market are risky decisions.
4. Whether to buy an established property or Off-Market
Many new investors to a market unintentionally revert back to their home-buying approach; resulting in an emotional bias toward buying established property. While this approach has a level of comfort, this benefit comes at a cost. Established homes in a superheated market are almost always the most expensive way to enter the market and the fast turnover leaves little room for the level of due diligence that make for good investment decisions.
Off-market purchasing can offer lower entry costs and greater tax benefits, but picking the right project in the right area is critical. New investors often struggle to find and appraise off-market projects in a way that gives them sufficient comfort. And the due diligence takes requires time.
Fortunately, Finvest has an established process for doing this that can help investors make sense of the Brisbane, Gold Coast, Sydney, Melbourne and Victorian regional markets.
We recommend that clients wanting to do some of their own initial due diligence start by paying close attention to the track record of the developers in these areas. There is a core group of developers that consistently build high quality projects that hold and increase their value. Look at the longevity of the developer and the resale prices of their previous projects. We find that these developers have a formula that works and are extremely protective of their reputations.
We work with a select group of developers who have been rigorously screened and vetted to ensure that they consistently deliver for us and our clients.
Buying without flying
COVID has meant that the remote inspection has become far more useful and commonplace than it was prior to the pandemic. If the project is complete or a display version is available, ask for a remote viewing to get a sense of the flavour of their work. And don’t forget to go beyond the finishes and floorplans. Good luxury developers continue to lift the bar in terms of luxury amenities and lifestyle components.
If you would like to know more about luxury off-market investment opportunities in Sydney, Melbourne, Gold Coast or Brisbane, contact us to have a chat. We offer free online training, free one-on-one guidance sessions and access to some of the best off-market opportunities on the Eastern seaboard.