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Where To Buy Investment Property? Look For The Sweet Spot

buying investment propertyWhile there are definitely a few stand-out property investment options, many properties do not quite make the cut. At best, they return poor profits when resold and at worst, you just run up losses on them. What do you think differentiates a good property from a bad one? To answer the question, “where to buy investment property?”, we should work towards finding the sweet spot of the real estate market.

It is true that each market can have its peculiar characteristics and may present a different dynamic but it is also true that as they’re lying within the same growth cycle, most of their characteristics remain the same. So if you have a great idea for locating the sweet spot of the Sydney market, it is likely to work (with certain deviations) for Melbourne, too.

Let us then search what makes for a property sweet spot and how we can figure it out. Don’t we all want higher ROI? There is also that one special characteristic of a great investment suburb you will so want to know. Read along!

Where to buy investment property? Location holds the key

Location is central to finding the property sweet spot. What is a sweet spot? It is the point at which maximum favourable conditions converge; in other words, it is the most effective area. Since we have been repeatedly hearing the real estate mantra,  “LOCATION, LOCATION, LOCATION” for a significant part of our lives, we already have more than just a hint that LOCATION can be quite a significant aspect of ‘sweet spot’ hunting.

Property investment mantra – find a good location!

property investment locationAnd what makes for a good location? There are quite a few factors, actually. When the mining industry took a dive, we learned an important lesson. Any location which has only one single factor of growth or, put another way, a single driver of economy, will eventually see a major dip in its real estate when that ‘factor’ or ‘driver’ collapses. That’s exactly what happened with all the property markets which boomed due to the robust growth of the mining sector.

When the mining boom went bust, there were no takers for properties in these areas because of the widespread perception that these particular areas would, in the coming days, be saddled with lack of infrastructure spending, high rate of unemployment, and a general lack of consumer sentiment.

What lesson can we get from this? We must always look for our property sweet spots in areas which are supported by multiple drivers of economy. This way, even if one pillar collapses, others will pick up the slack and support the local economy of the area, and your property will most likely not suffer from a decline in capital growth.

Australian property investors may also hunt for locations with high rental yield

Another very important trend to look towards is the rental yield. Property investors have a sharp mind and an astute vision. They have the backing of a sound professional team in many cases, so they are unlikely to make the wrong moves. Now some of them prefer gearing- the idea of leveraged property investments – and they do so by using negative gearing and its great tax advantage.

This way, they have to pay a part of their mortgage out of their pockets because the rent received does not quite match up to the monthly mortgage. Then again, it is still all part of a good day’s work for them because their portfolio plan revolves around capital growth.

Real estate in Sydney has another spectrum of investors, too

On the other spectrum of the market, there are a few players who like to receive rent that’s enough to meet their mortgage obligations and keep a positive cash flow going for them. They, in other words, like to positively gear their properties.

It is not then difficult to see that these two types of property investors/ buyers look for two different things (bipolar) and hence their property sweet spots may be different. After all, an area exhibiting high capital growth may show up poor rental yields.

Buying an investment property – remember, growth does not happen uniformly (and this is good news)

buy investment propertyGrowth never quite happens in every single area of a city or state. There are a few pockets which display greater growth than others. In fact, the classic cause-effect-cause chain is at work in these best investment suburbs. First, they exhibit smart growth. Then, as an immediate effect, the government starts spending on their infrastructure. Buoyed by the infrastructure growth, people start migrating to these suburbs and there is a definite gentrification trend and what this does is cause further value growth in the area.

To reiterate, the classic cause-effect-cause chain is at work here. So, while locating the sweet spot, you may want to take a look at the local council reports (both the one that is readily available and the one that needs to be dug out through sheer persuasion) and figure out not only what the government spending has been in a particular area but also what it is likely to be in the recent future.

Your investment property should be chosen with an eye towards Comparable Sales Figures

It may be wise to go through the comparable sales figure of the main neighbourhoods that you are targeting. This figure suggests the average value at which houses similar to the one you are searching for have sold in the last 3-6 months. The higher the comparable sales figure, the higher the demand for housing in your neighbourhood. However, it is important to muster all your astuteness so that you get the balance right.

If you buy in areas where the comparable sales figures are too high, you are likely to be purchasing your property above the market value. It may still be a good strategy if you are going to hold it long because changes in household income, inflation and general rise in living index will bring a smart profit for you (fingers crossed!) over time, even if you do buy on the higher side of things.

However, if your agenda is to buy and resell in a reasonably short span of time, you may face a crisis of capital growth because you have already bought it fairly expensively. This said, comparable sales figures are definitely a big indicator of the real estate sweet spot.

Property investment advice – seek out professionals with a proven track record

Why do we hire professionals? It is because they can guide us a lot better, and those with a proven track record can give us some really useful insights. Use their services to learn the best way to diversify your property portfolio, and diversify you must if you want to maximise your returns.

You will do well to read as much about the performances of various estates in the recent past as possible. It’s not like being in NSW means you cannot buy in Queensland, so why not make relevant property research? In fact, property portfolios should be spread far and wide so that a lull in the economy of a particular state does not dampen your portfolio.

Also, because different states peak and fall (the crest and trough) at different times, diversification may help you get a smarter retain this-sell that strategy. So the first important thing is to figure out where the prices are improving and whether it is a trend or a one-off occurrence or a fluke. Find out if there are certain areas which have been doing badly for quite some time.

Ideally, these are the areas you should bypass but sometimes, though it is against the logic of locating the sweet spot, these may be the places when a sudden counter-cyclic growth shows itself. Of course, you will have to work very hard and at the same time, need to be very lucky to anticipate such movements.

Property investment tends to work best when made in diverse areas

diversifying property investmentThere is another reason why it is advisable to buy in different areas. Let us suppose you have really done well with your first property and have built quite some equity. Having seen phenomenal value growth, you are in a position to buy another property with the equity built in the first property.

But why shall you do this in an area where the values are already close to their peak? You will need to look into areas where the market is not soft but not sailing high either. This way, you can buy a property through another in the same growth cycle. This is why the term ‘sweet spot’ holds such importance. Deviate a little from it and you will ruin your best chances, but if you manage to find it, you are poised to make the most out of any growth cycle.

We also learned in the above paragraph that the sweet spot is not only about ‘where’ but also about ‘when’. There is always that one particular time when the iron is at its hottest, and this is when you should strike, as the cliché goes.

Where to buy property in Sydney? High demand, renovation-worthiness and lesser inventories

You may like investing in areas with high demand and where you have to deal in lesser inventories (what taxpayers use to calculate profit/loss or to report property losses to companies insuring them). Naturally, to make the most out of these investments, you will also have to indulge in upgrades. This brings me to another area of discussing the sweet spot: Choose areas which are flush with renovation-worthy properties. Look keenly into the “frequency of adjustment” sheets available and learn which adjustments typically get you the highest price.

Figure out whether it is the deck, the living area, the bedroom or the curb area/landscape. Once you know where to begin, give it your all. It will help you get appraised generously as well as impact the final price during resale in no lesser terms. I will also recommend that you use tradeoffs like “pets allowed” if it helps you stand apart from the crowd of the rental property owners.

Sydney property market pointers:

1) Lack of skilled labour

I have also figured out that the lack of skilled labour has quite some say in determining the price of house. If there is a lack of such labour and there is no net interstate migration of skilled labour either, it will take more money to build houses.

If new properties are being built for a greater price than the market average, the existing properties will be impacted, too. They will also sell for a higher price than usual. So, while skilled labour is very much desired by any economy, its lack can serve your real estate interests well enough.

2) Population explosion

Look for those areas where the population is exploding or, at any rate, increasing at a good pace. These will be those areas where you will find a shortage of rental properties and hence a higher rental rate. These are exactly what you would be seeking if you have positive cash flow on your mind (remember, we talked about the two spectrums of property investors).

3) Average wage

Seek areas where the average wage is high enough because it directly translates into greater purchasing power. Once, the tenants earn more, they can pay higher rent thus allowing you to generate positive cash flow (rent received being higher than the mortgage)

property investmentSydney real estate news can play an important part in your research

While market sentiment plays a great part in determining how a market evolves, it is no less true that external factors can sometimes have a huge say on the matter, too. Moreover, external factors can change the dynamics pretty quickly. Think for instance, what could happen to the Melbourne property market if it could host, say, the Olympics. The last time it did in 1956, the property market was not the multibillion-dollar behemoth that it is today.

If Melbourne outbids other coutries in 2024, imagine what it could mean for its real estate. News creates just this kind of shift in momentum. And you cannot know all about how news shapes the market unless you are glued to Sydney real estate news. Quite a tool to pick up the sweet spot!

Best investment suburbs in Sydney can be found but life may still get in the way

The site-flipping or the buy-renovate-sell model is indeed for the property speculators, but is a time-tested fact that properties offer the best returns when retained long enough. This directly implies that you should have a long-term property vision. This way, you can build smart equity in one of your properties and buy another investment property through it. Of course, if you have been able to hit the sweet spot consistently, you will be able to purchase a lot more properties in quick time (and a number of times within the same growth cycle).

Life is not a mathematical formula, and if it actually is, we have not found it yet. There will be ups and downs in your life which will plug a hole in even the best portfolio decisions you make. You may have to ‘distress sell’ properties you had intended to keep for long. You may completely lose interest in a geographical location because of certain factors (I had a client who sold off all his Australian properties to shift to Florida because his grown-up children wanted him to live with them. Now he has a dozen or so properties in the USA).

The idea behind saying this is that while you cannot swear by a mathematical formula in life, you can definitely do so in the real estate market. And because it is possible, you can create a terrific portfolio for yourself in time and hope life does not lead you astray from the goal. Do not, however, forget that what will help you most in your quest is the frequency with which you hit the sweet spot.