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
