Five steps for choosing the right investment suburb

Five steps for choosing the right investment suburb
Five steps for choosing the right investment suburb

When it comes to choosing the right investment property, there are a number of different approaches and it can understandably be a confusing environment for many. Emails continually come in to the Property Observer editorial inbox from readers looking at buying in different states, unsure about locations, or just wanting some guidance.

Here, we will briefly run through how to start considering your approach to selecting an investment property. Over the next few weeks, the Property Observer team will tear apart each part in the process to show you just how to replicate the process.

1) Your personal situation

- What are your goals in life?

- What do you hope to achieve with property?

- How will you achieve this?

Figure out what this look like in terms of a time frame (how long do you have?) and how much you need (what return does it need to give me?). Consider cash flow and capital growth, and decide whether you're requiring a positive cash flow right now, or in the future, or if you're willing to pay out each week and hope for some capital gain.

Understanding what the property needs to do to fit into your portfolio is absolutely critical. There is little point buying a property that has terrible cash flow, but fantastic long-term capital growth potential, if your plan is to improve your current living situation. Similarly, if you have your heart set on renovating for capital gain, it's unlikely you'll want to be buying in a brand new estate. You might want to read Margaret Lomas’ response to an investor who asks whether they should buy established or new.

Consider your appetite for risk - are you willing to buy in a mining town that may experience a significant downturn for the chance of strong cash flow? Your 'sleep at night' factor is a critical part of this.

You will also want to assess your borrowing capacity, current financial situation and similar. This may require the services of some form of adviser, broker, financial planner or investment mentor. Investors are advised to ensure they check carefully about who they do business with.

2) Turn to the 'macro'

- Are you comfortable buying in another state?

- How are the states/territories performing?

- Where do they sit on the property clock?

There are thousands of suburbs across Australia, and there's no way you can check them all. Property buyers should become familiar with the concept of the property clock and try to place each of the different states and territories onto this diagram as part of their initial analysis.

For investors wanting to learn more about the property clock, observer Jo Chivers wrote about working out where your region sits on this clock before considering development.

Remember that buying low and selling high is a common investment mantra, but that it can be difficult to see where the bottom is and when the top has passed until later down the track.

You will also want to cultivate an understanding of the different overall forces within each state and territory. Understand how changes in the public service may affect the ACT, for instance.

3) Digging down

- What can you afford versus what is available?

- What are the overall plans for the state/territory selected?

- How do the areas stack up based on your statistics?

Here, your price point and borrowing capacity will become even more important. As you try to choose a region or more localised area (such as, for instance, Sydney's western suburbs) you may find that your price point helps you refine this quickly. Other statistical indicators, relating to your strategy, can also help you shortlist. This may include rental yield, proportion of houses v apartments, income growth and a number of other statistics that investment experts regularly hang their hats on.

You will want to be taking the list of wider areas that you can afford and going through them, checking for overall drivers and growth prospects in the areas. If they're largely driven by tourism, then you'll want to understand the potential fluctuations in this labour market, and how this may flow-on to your investment property.

It will also be worth looking at government plans on a wider scale to try and pinpoint areas of growth. If, for instance, a rail line is being put through a whole area and there is significant infrastructure investment, then you may want to consider it more highly. Be wary though, sometimes these initiatives are reactive, rather than proactive - that is, they are put in as a result of growth rather than in expectation of it.

Understand where these areas sit in relation to the rest of the state/territory. Understand its distance from major employment hubs, and how it differs or is similar to other areas.

4) Localising your knowledge

- What are the plans for the areas?

- How do the dynamics work within the local government area (LGA)?

- What are the locals saying?

- What are the statistics saying? We have free data available here.

When you have chosen a broader area, such as an LGA, in your price point, you'll want to become aware of how the individual suburbs work and the reputations of each.

For instance, in Sydney's Hills District, Castle Hill is a more expensive suburb with a busy, mini-city like atmosphere where the properties are tightly held. Beaumont Rise, however, is a brand new estate with smaller plots. In quickly developing areas, such as these ones, you'll want to know the inner-LGA dynamics.

One way to do this is to speak to the locals yourself, discuss with real estate agents, buyer's agents and property managers, and to call the local council. Ask about upcoming plans for the area, any new developments and similar. Get to know what the people, on average, tend to be like across the region. Jump onto the ABS' QuickStats Census data, or .id informed decisions to get a statistical understanding, but start reading into the local culture as well. Crime statistics and reading the local paper can also be quite revealing.

Getting an idea for how quickly properties can be developed in the local area is important, as supply/demand statistics will underpin much of your investment strategy. If there is endless developable land, then you might want to have a closer look.

5) Understanding your specific suburb

- What is the good v bad side?

- What is the price ceiling and what are different properties worth?

- Which properties are most desirable?

- Check the level of amenity

When you have a small area to deal with, there is still a 'good side' and a 'bad side'. Some suburbs have streets where prices range from $1.2 million plus to $500,000, often due to views or busy streets or a combination of factors. This is often referred to as 'pricing disparity'.

You need to get a quick knowledge of the worth of properties in the suburb so that you don't pay too much and can identify a deal quickly when it comes along. You'll also want to ensure you're on the right side of a suburb, or the street that doesn't have an inbuilt 'value ceiling' due to unchangeable factors, such as a noisy train line.

To do this it's worth looking at comparable sales, visiting home opens and, again, speaking to local experts. You will also want to attend auctions if it's a popular selling method within the suburb. Keep your eyes and ears open, and keep detailed records of what has been selling, comments that other buyers have been making and their reactions to different types of properties. Ideally, you will want to know how the addition of a room, or a pool, or a car space, affects the value of a property.

Observer David Airey wrote about how to figure out the value of a property in a recent column, while Patrick Bright also told us that inspecting 100 comparable properties is one way to do this due diligence.

Find out where most of the renters live, and what the renter/owner occupier split looks like. You'll also want to know how this suburb compares with the averages of the wider area you previously researched.

Get to grips with the local demographic. See how this differs from what you saw in step four. If your chosen suburb is filled with families, then you'll potentially want to be looking at family-friendly stock. But are they a young family? Do they tend to have two children or three? Are the parents professionals? In different suburbs, the desire for certain types of properties differs. Understand what is desirable currently, but also down the track when you might be inclined to sell.

Check out the local development applications. If there's a big apartment block going up in the suburb, this isn't necessarily a negative thing for you. However, you'll want to know what the impact may be.

Consider tools such as WalkScore, Google Maps and NearMaps to shape the area's dimensions in your mind. Decide where the 'best' pockets of the suburb are - where demand is highest. Then consider how your investment requirements fit around this. It's often worth heading out there yourself for a look, but remember not to be blinded by emotion.

The next steps

Remember to keep all your details together so you can refer to them when necessary. Every investor has a different strategy and a unique approach to the type of property they buy, and the reasons behind it, and the savviest investors regularly refine their process.

Which parts of the process would you like fleshed out more? We'll be delving into the different research techniques for you, how to decide the good versus the bad side of a suburb, and how to tell if a property really is comparable.

Email: jduke@propertyobserver.com.au

Jennifer Duke

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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