Perhaps you’ve heard me say that the location of your property will do around 80% of the heavy lifting of its capital growth.
“Location, location, location” is a well-known expression that highlights the importance of finding the right property in the right place.
While we know it’s important, we sometimes forget why.
So let's delve deeper into what we mean when we talk about location, and why it's so important.
Location: The 4 different types
First, let's look at the types of locations.
Not all real estate locations are equal and just like there are different precincts on the Monopoly board, there are basically 4 types of locations where you could buy properties in the real world, and some are much more worthwhile than others.
1. DISCRETIONARY LOCATIONS
These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.
In general, these locations are the established inner-ring suburbs of our capital cities or suburbs and while they would ordinarily be considered A-grade locations, their property cycle values are usually more volatile.
2. ASPIRATIONAL LOCATIONS
These are the upper-middle-class areas and gentrifying locations of our big cities which would also be considered A-grade suburbs.
These include suburbs where affluent millennials aspire to live in as they move to the family formation stage of their lives.
When this wealthier demographic moves into a suburb they tend to push up property values and create a ripple effect producing economic, social, and cultural change.
3. AFFORDABLE LOCATIONS
This is where most homeowners and many investors look because it’s where they can “afford” to buy.
There is no doubt some affordable areas make good investment locations, especially those that benefit from the ripple effect from adjoining aspirational suburbs and eventually become aspirational suburbs themselves.
However, most of these types of locations underperform in terms of long-term capital growth and rental growth because many of the owners are financially stretched young families who are only one or two weeks away from being broke.
As an investor, I would steer clear of these affordable locations – most of these will never gentrify in your lifetime and they will underperform and could even end up being more trouble than it’s worth.
4. LAST CHOICE LOCATIONS
In every city, there are suburbs where people live because social circumstances mean they have no other choice.
Of course, investors should steer clear of these locations.
Location: 7 factors to look for to find the right area
Now that we know that not all locations are created equal, we realise we need to look for investment-grade suburbs.
But, if you don’t know what you’re doing, these can be tricky to spot.
There are many factors to take into account when looking for your next investment property, but if you do your research to find an investment-grade location, you’ll be well on the way to making a good investment decision.
1. GOOD DEMOGRAPHICS
The first factor to consider when choosing an investment-grade location is the demographics.
At Metropole, we look for areas where resident incomes are growing faster than the state average.
That’s because moving forward our property markets will be more fragmented - blue-collar areas and lower socioeconomic areas will suffer more from the ravages of inflation while those with stable and increasing incomes represent a more stable property market.
2. LIMITED SUPPLY
While a lot of people suggest population growth is a key driver of demand for property, it is important to look at the supply side of the equation.
We like to invest in areas with a limited new supply of land or dwellings such as the inner and middle-ring suburbs of capital cities.
These areas benefit from high demand and limited property supply which leads to capital growth and rental growth.
In contrast, outer suburbs generally have an almost unlimited supply of land and new houses, which is the enemy of capital growth.
3. STRONG EMPLOYMENT OPPORTUNITIES
If an area has a diverse range of employment opportunities nearby, it is more likely to attract and retain a population of working professionals and families, and this will maintain property values.
This will also provide a pool of reliable tenants.
4. GOOD INFRASTRUCTURE AND AMENITIES
Infrastructure refers to the basic services and facilities that support the local community, such as roads, public transport, and hospitals.
Amenities, on the other hand, refer to the recreational and cultural facilities that enhance the quality of life in the area, such as parks, restaurants, and entertainment venues.
Areas with good infrastructure and amenities are more attractive to both owners and tenants, which can help to drive up both property values and rental yields.
After all, it’s all about the lifestyle and what we call a 20-minute neighbourhood.
We’ve found buyers are willing to pay a premium for properties that are within a short distance of a great shopping strip, your favourite coffee shop, amenities, the beach, and a great park, and as a result, these are the type of neighbourhoods that investors and wannabe homeowners are flocking to.
5. PROXIMITY AND THE WALKABILITY FACTOR
The 20-minute neighbourhood is key, but if it's within walking distance then it's even more valuable.
Investment-grade locations with easy access to shops and lifestyle precincts with high walkability will remain in high demand moving forward and have already seen more than 36% growth over the past 5 years.
Gentrification is a process where a neighbourhood, area or even a street is improved and redeveloped with wealthier people moving in, leading to an increase in property values and slow displacement of older long-term residents due to rising housing costs.
This process often starts with the influx of middle or upper-class residents, new businesses, and amenities, which attract further investment and development.
As a result, we see the average income for the location shift up a gear as this higher-income earning demographic moves in.
Gentrification is a positive factor for property investment because it brings economic benefits and improvements to an area which in turn creates more demand and therefore attracts higher prices for local properties.
7. LOW CRIME RATES
Areas with a low crime rate are far more desirable to live in than those with a higher crime rate - people are willing to pay more to live in a safe suburb where you can live without fear of crime on your doorstep and this higher demand helps to support property prices.
Location: How to pick the right property in the right location
Just like not all properties' locations are the same, not all properties within each location are the same.
Even in the best suburbs, it’s important to know how to pick the right property.
You’ll want to look for A-grade homes and “investment grade” properties are the type of assets you want to own, and the type of properties, where great tenants want to live, not because they need to, but because they want to and are prepared to pay extra to live there.
Think of family-friendly apartments in the great neighbourhoods of Bondi in Sydney or Elwood or Fitzroy in Melbourne.
Meanwhile, B-grade properties are less desirable and therefore more volatile and C-grade properties should be avoided unless demolition is the plan.
Here are a few things to take into consideration to find the best properties in investment-grade locations:
1. NEIGHBOUR PRIDE
Do the neighbours surrounding the home you are thinking about buying have pride of ownership? Manicured lawns and clean and tidy driveways will make your property more desirable.
2. SUN EXPOSURE
Sun exposure should be a big consideration because it directly affects utility bills and natural light.
A north-facing orientation is the best in Australia - during the full force of summer the living area and garden will be protected from the sun's force through shading and then in the winter, since the sun moves slowly from the east to the west at that time of year, the living spaces and garden will enjoy more sunlight.
3. OTHER EXTERNAL FACTORS
Flight paths, traffic noise, planned construction - you should also look at extra external factors that could negatively affect the property.
Location: Here’s why it’s so important
I mentioned it at the beginning of this article - the location of your property will do around 80% of the heavy lifting of its capital growth.
So the wrong or sub-par location will certainly negatively impact the potential for your investment property’s capital growth.
After all, a property in a sought-after neighbourhood, close to desirable amenities, and with low crime rates will generally command a higher price than a similar property in a less desirable area.
Investment-grade properties will always be in demand by owner-occupiers and in locations that will continue to be desirable because of their proximity to infrastructure and amenities.
The fact of the matter is no one ever saved their way to the ultimate goal of financial freedom.
Instead, they invest wisely in assets that grow in value over time to provide them with a lifestyle everyone dreams of, but unfortunately, relatively few accomplish.
This means for investors in the asset accumulation stage of their journey, the more capital growth you achieve (even at the cost of lower rental income) the more wealth you will accumulate in the long term.
The trick is finding the perfect property, and that’s how the expert team at Metropole can help.
The bottom line…
The lesson here is that not all real estate is equal.
I know it’s often said that a “rising tide lifts all ships”, but in real estate that’s not really true.
A-grade homes and investment-grade properties in discretionary and aspirational locations are currently outperforming other types of property and are likely to continue to do so as affordability bites and affects the lower end of the market as prices keep rising.
So be careful … don’t get stuck with an underperforming property in the wrong segment of the housing market, because if history repeats itself, and it most likely will, you could end up with a dud property that you will regret owning and have difficulty selling if you need to.