What makes for an investment grade property?

Property investment is a long-term game and it’s really a combination of time IN the market as well as TIMING the market for the savvy investor.

As owner-occupiers are the biggest percentage of buyers in the housing market, they create much of the demand and therefore drive capital growth.

Importantly, owner-occupiers are fussier than investors. They buy with their heart and get emotionally invested for family needs, human needs and location requirements.

But investors buy with their calculators.

Why owner-occupiers & their needs matter to investors

So, what does all this have to do with buying an investment property?

Well, savvy investors should focus on buying what owner-occupiers are looking for, so they can select a property which is desirable to that buying group.

The bottom line is any property can be investment stock, but not all properties are investment grade. Being able to decipher the difference is the fundamental point here.

Whilst location does roughly 80% of the heavy lifting in terms of growth, the remaining 20% relates to the property itself. If you buy the wrong property you will undo all the good work you’ve done by choosing the right location.

So, in addition to owner occupier appeal, investment grade property should have the following characteristics.

Scarcity: location & dwelling

The scarcity of location is important and this involves buying close to the city centre where there is little land left, close to public transport, the beach, the CBD or employment centres.

Also, the dwelling needs to be relatively scarce. What sets that property apart from others in the same area? Is it the land or perhaps a courtyard, garden, high ceilings, art deco features, huge bedrooms, a second bathroom?

Lifestyle drivers: Local amenities matter

Think of the lifestyle factors that make the property attractive such as local cafes, schools and parks. Picture: realestate.com.au

Lifestyle drivers which include a great shopping strip with cafés, bars, good schools, dog parks and the like are important to buyers.

If someone feels connected to the culture and people of an area, they will pay more for it.

Mainstream lending appeal: Will the bank fund it?

Last week we looked at what basic criteria banks look at when assessing a borrower, but don’t forget lenders also take a close look at the property itself.

Investors need to buy the type of property the banks love to lend against, for both you and owner-occupiers.

After all, property investing is a game of finance, not bricks and mortar.

Investment stock & the right advice

Does the property appeal to owner-occupiers? Picture: Getty

Investors need to beware.

Lots of housing stock is being built for and marketed to the investor market with medium and high-rise dwellings commonly targeted to this segment.

There is a risk of oversupply when two or three similar buildings are all sold at once, meaning growth will be slow and finding a tenant more difficult. These properties often have minimal appeal to owner-occupiers due to this lack of scarcity.

So, ask yourself the question – is the property being sold based on tax advantages or rental guarantees? While tax benefits and depreciation are good, they’re not your sole concern. If there’s strong demand from local tenants, then the primary focus should be on owner-occupier appeal.

Also, it’s easy for investors to be taken advantage of by some property advisors who are far from independent. Some property advisors are more like sales people as they are paid by the vendor to sell the property.

So, how do you ensure the advice comes from someone impartial?

Simply ask the advisor how they’re being paid. Is it a fee for service paid by the buyer or a sales commissions paid by the seller? If it’s the latter, then simply be aware that the advisor has a conflict of interest in trying to serve both the seller and you as the buyer.

All things considered, our view is to consider buying an established house or older style low-density unit, in a great location close to a major capital city.

You can create depreciation later through a strategic renovation, thereby creating your own tax benefits in the future whilst getting the fundamentals right in the first place.