One of my guiding rules for property investors: buy what owner occupiers want to buy.
Yes that’s right, buy what owner occupiers want to buy. Here’s why.
In Australia, almost 7 in 10 homes* are owner occupied. Therefore, owner occupiers create the lion’s share of demand for residential property. So if you invest in a property that owner occupiers want to buy, it’s going to appreciate faster than a B-grade property marketed to investors.
Now I know what you might be thinking. If I’m buying for investment, why wouldn’t I buy the cheapest property I can that’s going to deliver the highest possible yields?
The simple answer is that all property investors, in my opinion, should be focused on growth ahead of yields. You’re right, you could buy a more ‘affordable’ (and usually inferior) property and get a similar yield, but it won’t appreciate as strongly as an ‘in-demand’ property with features that appeal to owner occupiers.
Next question. What if you have a ‘buy and hold’ strategy, so you have no intention of ever selling your investment? Do you still need to buy a property that owner occupiers would want to buy? The answer: Yes. The reason: Capital growth should still be your focus, and ‘in-demand’ properties appreciate faster.
You’ve got to remember that things can change. You need to consider this as part of your risk management. If something happened and you needed to liquidate (sell) the asset, you’re more likely to get a better price in a shorter timeframe if your property appeals to owner occupiers, because they’re 70% of your buyer pool! Better quality properties are also more likely to sell in any market conditions, which further reduces your risk.
More: Investment properties: Starting out
Even if you do hold the property for life, you need to remember that you don’t need to sell to reap the benefits of capital growth. As time goes on, a better quality property will provide you with greater equity to draw on in the future.
You know those property ads that directly target investors? They have a screaming headline about the high yield and the ‘affordable’ asking price? Many of these properties are cookie-cutter apartments on busy roads in inferior locations – you know the ones, with panoramic views of a train line through the backyard? Developers market these as “hot investments” because they know owner occupiers won’t be interested.
Take a look at any suburb and you’ll see a lot of rented accommodation along the main roads. You can buy such properties cheaper than others due to the location, and they’re reasonably easy to let because tenants often aren’t too fussed about a busy road address, as long as the home is quiet and close to amenities. A property like this might rent well but it will never achieve as much capital growth because owner occupiers don’t tend to want to live on main roads.
So when you’re out looking for an investment, consider what features would appeal if you were looking to buy a new home for yourself or a friend. A good layout? Lots of light? A pleasant neighbourhood? A quiet street?
If a property ticks all these boxes (ie the typical ‘wish list’ for owner occupiers), you’re probably onto a good thing.
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