Suburbs investors need to avoid: Response

Hello everyone,

This is great! I love the questions and comments.

Kath is spot on... ‘planned’ as opposed to ‘committed’ is my point. Too many projects are announced in the media as ‘planned’ to then subsequently be shelved by governments for one reason or another. And yes, bridges, rail links, freeway extensions etc., all add value to property prices that are enjoying the benefit of the expansion. However, there are far too many projects that do not go ahead and thus investors have jumped the gun, made a purchase, yet only to discover that the infrastructure did not proceed.

So I ‘caution’ any investor and recommend that they do thorough due diligence before buying a property. ‘Caution’ means – do some more homework and then make a financial decision based on fact.

Not all growth corridors are created equal. Many DO enjoy strong demand by tenants – yes, even all over Australia. However, there are some suburbs that are predominantly ‘first home ownersville’ and do NOT have a strong demand from tenants.

As an investor, it is your job to identify if there is a strong demand for your property. I certainly do not want any investor to have to suffer long vacancies on an investment property simply because adequate research wasn’t done in the first place. It’s a common mistake, however, you can save yourself many sleepless nights by talking to the local property managers.

And yes, I stand by my comment that “I would prefer that clients would stay away from areas where the projects are planned, and rather they went there after it’s built and pay 50 grand more, but at least that way their investment is more secure for the future.”

Most investors are ‘foxes’ looking to make a quick buck, not really conducting enough due diligence and end up with what I would call a ‘good’ investment. Hey the property is OK, it’s often negatively geared but doesn’t really enjoy strong capital growth. I see investors trying to ‘get in early’ to enjoy the benefit of capital gains when infrastructure projects are planned to be built. This for me is speculation, this for me is gambling with a truck-load of money, a risk I am not prepared to take.

I prefer a methodical, process driven way to invest. I don’t deviate from the process nor do I take short cuts. Therefore, my method is low risk and deliberate whereby I factor in my strategy, buffer (or worst case scenario) and exit from the deal. All this is thought through before purchasing any property. And 99% of the time, I know and understand the outcome, and by that I mean, how much I will earn in cashflow (positive or negative) and capital growth. I know what the suburb has done for the last 3, 5, and even 10 years and what it is expected to achieve in the next 5-8 years.

Therefore, I would target urban growth corridors that have shown a strong history of growth with strong signs of it continuing. I also look for strong rental demand from tenants as well. If the data also tells me that the area has achieved strong results for the last 10 years and is predicted to continue for the next 5-8 years, then this is a ‘great’ property. And infrastructure projects are factored in when making an assessment of the suburb.

As for paying $50,000 more...
Let’s use Mark’s suggestion of a $400,000 property as an example.
If you paid $50,000 more for a property because the infrastructure was built, which in turn created more demand for the area, then you will have paid a purchase price of $450,000.  If it is predicted to grow by 8% p.a. then this equates to $36,000 p.a. Therefore more demand, more growth, and more equity.

On the other hand, if you buy a $400,000 property  and the infrastructure projects do not proceed, then the property may only grow by say 3% p.a. which equates to $12,000. Hence less demand, less growth, less equity, and fewer buyers around when it’s time to exit from this property.

My money is on committed infrastructure projects that will protect my investment today as well as tomorrow!

All the best.