Investment grade property

The once-in-a-generation property boom we experienced during the Covid pandemic and which was fuelled by historically low-interest rates at a time of strong pent-up demand was a time that encouraged many investors to consider buying their first or their next property.

But the market is different today you can't just run out and buy any property.

Because not all properties make good investments!

In fact, in my mind, less than 4% of the properties on the market currently are what I call "investment grade.”

You see...currently there are fewer properties on the market than there have been for a long time, and while there are still many properties on offer, there is now a real shortage of quality "investment grade" properties.

Of course, any property can become an investment property.

Just move the owner out, put in a tenant and it’s an investment, but that doesn't make it "investment grade”.

An investment-grade property is one that offers strong and stable rates of capital appreciation, a steady cash flow, liquidity, easy management, a hedge against inflation, and good tax benefits.

Having said that, I believe investors should invest for capital growth first.

It's easier to build a substantial asset base that way and then you can eventually buy your cash flow down the road.

Think about the location

So before buying your next investment property, you need to ask yourself, would this property be considered investment grade?

For example, will the location outperform in the long term because of its demographics?

When considering the demographics of a location it’s not just about owner-occupiers but also the demographic of the tenants who are likely to rent your property.

You don't really want a tenant who's only a week or two away from broke do you?

I look at locations where the tenants that are aspirational, have good income and are likely to have increasing income over time so they can pay more rent in the long term.

Think about the neighborhood

Is the property located in a 20-minute neighbourhood- in close proximity to shopping, amenities work?

Generally, a good neighborhood is determined by the physical location, suburb character, and its close proximity to amenities such as a shopping strip, park, coffee shops, education, and even some jobs.

It’s obvious then that in our new ‘Covid’ world, people will want to be in a location where everything they need is in short 20-minute proximity - whether that is on public transport, bike ride or walks - to their home.

Think about the property

Once you’ve done the above, the next step is to think about the property itself.

Will this particular property outperform the averages in the long term?

Will it appeal to a wide range of owner-occupiers and tenants?

Because remember, you’re not looking for short-term profits, you want to outperform the long-term averages.

You need to work out the land-to-asset ratio (the higher the better) and decide whether there is something special or unique about this property.

Is there potential to add value to this property - manufacture capital growth through renovations or development rather than just waiting for the market to do the heavy lifting?

Finally, in order to determine whether the property is investment grade you need to be confident you’ve done all your due diligence on the location and the property.

Are there any risks?

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Jason Gwerder
Thursday, 26 May 2022

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