Before asking which property to buy, ask yourself what kind of property is right for you: Mark Armstrong
If only we had the proverbial dollar for every time someone has asked us ‘which property should I buy?’
The mistake most buyers make is that they ask this question first, when it should be the last in a long line of others. They choose a property and build their purchasing strategy around it, rather than developing a strategy and then finding a property to suit it.
In doing so, they run a higher risk of choosing a property that won’t deliver the lifestyle or financial benefits they need. It may even put them behind the eight-ball, making it much harder to play catch-up down the track.
To choose the property that really is right for you, you need to start with the most basic question first: Do you want a property to live in as your family home, or purely as an investment to rent out?
If a home to live in is what you’re after, it’s important to choose one that will cater for the way you live—not just now, but for the medium to long term. Property is expensive to buy and expensive to sell, so why spend thousands on stamp duty and agents’ fees until you absolutely have to? By holding the property for seven to 10 years, you’ll also give capital growth a chance to do its work; an important consideration even when you’re buying primarily for lifestyle purposes.
Take a close look at your lifestyle. How many people will be living in the property? Are you intending to start a family during the time you live in the property? Do you already have children? How old are they now, and how old will they be in seven to 10 years’ time? Will they need a lot of outdoor space to run around, or is their indoor space more important? If you buy a smaller property now, will you need to extend it as your family’s needs change?
Do you want to live in a certain area to access your preferred schools or tertiary institutions? What about your working life? If you work in an office, can you commute by public transport, or do you prefer to drive? If you’re planning to work at home, what kind of floorplan might you need to separate your working life from your home environment?
If you want to buy a property purely as an investment, your lifestyle requirements and personal preferences must take a back seat. Too many investors evaluate properties based on what they would like to live in. It doesn’t matter if you don’t like the property and wouldn’t live in it yourself. The important factor is whether it will deliver the right financial outcomes.
This is where the next question comes in. What’s more important to you—capital growth or income flow?
If you’re in your working years it’s generally best to focus on capital growth, because that’s what will build your equity, or wealth base. You can use your working salary to fund the purchase and pay the mortgage. As time goes by and your equity increases, you can borrow against the equity to buy further wealth building assets.
As you approach retirement, however, and the prospect of 20 or 30 years without a salary looms large, it’s more important to focus on property that will deliver enough rental income for you to live on.
As a rule, residential property is best for capital growth because its chief value lies in the land it sits on, not in the building. Look in areas with a limited supply of properties but considerable demand from buyers. This will drive land values and maximise capital growth.
By contrast, commercial property is your best bet for income replacement, because the main value of the property lies in the building and the rental income commercial tenants can generate. Focus on fast growing population corridors with increasing demand for services like petrol stations and convenience stores. The more people who spend money on these services, the higher your tenant’s turnover and the more rent you can charge.
Can’t afford to buy commercial property or want to diversify and spread risk? Consider a commercial property trust instead.
By asking the right questions from the start, you’ll boost your chances of choosing the most appropriate property—maximising your financial position and lifestyle choices in the years ahead.
Mark Armstrong is a director of iProperty Plan, which provides independent analysis and tailored advice to investors and homebuyers.