Expert Advice by Sam Saggers. 20/07/2015
Investing across state lines might seem intimidating, but just like everything else in property investing, with the right knowledge you can take something that might seem scary and turn it into something that’s as easy as investing in your own backyard.
Why invest in other states
Australia is not one single market. It consists of a number of different markets, each at their own phase on the property clock with different strengths and weaknesses, different demographics, and different infrastructure spends.
All of these differences increase our opportunity to find areas that hold the promise of strong capital growth, which of course is how we create wealth.
If your properties are in different markets, they’ll very likely experience market lows where growth is stagnant at different times.
This means that when one property might be sitting still in terms of rental returns and/or capital growth, another one might pick up the slack, leaving you with an overall positive cash flow portfolio.
Each state has different requirements and land tax thresholds so you can minimise tax by buying properties in different states.
What to look for
Look for the following six property building blocks when investing interstate.
- Publicly listed property companies
- Competitive tension
- Growth and life cycle
A good definition of synergy, in relation to a real estate market, is that it’s “the interaction of elements that when combined produce a total effect that is greater than the sum of an individual element.”
In other words, it’s the unique blend of the various factors that make up a marketplace, such as the area demographic, economic factors, infrastructure and other such factors.
So what does this mean for you as an investor?
When you understand the synergies of a marketplace (what makes it ‘tick’) you’ll be able to spot those true opportunities for profit. You’ll know and understand what the area demographic is looking for; what will appeal most to the locals.
For example, what are the living trends in the area? Do residents prefer houses and if so, how many bedrooms? If units are preferred, are there any particular features they’re looking for (e.g. water views or proximity to university)
Publicly listed property companies
Large corporations (e.g. Coles) spend thousands of dollars researching profitable locations to do business. They plan their strategies years ahead, working out each and every detail to ensure their businesses continue to grow.
These companies are a catalyst to marketplaces, impacting both supply and demand by working with local government to upgrade existing infrastructure. Changes to the area encourage gentrification and often lead to growth of outer ring suburbs.
Reap the benefits of their research by finding out where they’re planning to invest their efforts.
You may not have thought of it this way, but when you invest in an area you’re not just investing in a single property - you’re investing in the community.
How, you ask?
You’re providing accommodation for individuals who will be contributing their talents in the form of employment - either as employee or employer. Your tenants will be spending their money in the area both through taxes and through consumer spending. So then, the economic lifeblood of a community is industry. Look for areas where there are a diverse number of employers, spanning different industries. There is safety in diversity.
Remember that even if the numbers stack up on a property, if it’s in a location with a single industry as the major employer, you could have a problem at some point along the line if that industry were to experience a downturn.
As you know, the real estate market is impacted by the economy, which is why you need to understand its machinations.
For example, rate changes impact more than just the cost of financing. It plays a sizeable role in market sentiment and the psychology of human behaviour within the marketplace.
When you understand the psychology of the market, you’ll understand why investing counter to the cycle (in other words, buy when others are selling and sell when others are buying) is a savvy way to create financial freedom.
As an investor, you soon learn that adversity can deliver a great opportunity when leveraged properly. That’s why savvy investors buy when the market is at its lowest point; they can get the best deal and reap the best returns when the market begins its upswing again.
Competition among the markets is often an overlooked factor in the success of a marketplace, which I believe is a mistake. We can improve our profits by playing markets off against each other.
By looking at as many markets as you can and comparing them against each other to see which locations are performing better.
When you compare similar markets against each other, focus on factors such as affordability, population growth, supply and demand.
In other words, find the right property within a market that is affordable and which is delivering the best rents. You’ll also want there to be room for growth so look for a demographic whose incomes can support an increase in both rents and property values.
Competitive tension can also be used as a means of negotiation. For example, when you tell an agent or a vendor that you can get a better deal elsewhere they’re more motivated to work with you.
Growth and life cycle
Remember this phrase: “after expansion comes contraction but after contraction comes expansion.”
Essentially you want to “buy low and sell high.”
This means you’ll be buying property - at a huge discount - when everyone is trying their hardest to leave the market. After a period of time the market will swing back around and begin to expand.
This is when you’ll realise your returns; at which point you’ll either refinance or sell to extract your profits.
Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.
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