Picking locations by the numbers

When it comes to selecting the best possible property investment, there’s no denying the old adage of ‘Location, location, location’ applies as much to new housing as to established property.

It’s the lynchpin of success because, unless you’re renting out a caravan to tenants, location is the one variable that’s impossible to change.

One distinct advantage of new-build investment is that you get to design a home that will appeal to your specific renter demographic in a given location. In fact, under these circumstances, selecting the right location for a balance between value growth and rental return becomes even more crucial.

But when it comes to choosing location, time and again I see investors get it wrong. Unfortunately, many simply fail to consider the most appropriate metrics. They’ll fall back on a less quantitative measure like the ‘vibe’ of an area, claiming those well-worn fundamentals associated with growth are enough to guarantee and excellent outcome.

Yes, fundamentals are crucial – it’s important to have things like great access to transport options as well as nearby convenience and essential services – but that’s really only half the picture.

Other investors will look at elements such as affordability and rental return. Again, important, but still not the only way to gauge an opportunity.

In my world, selecting a location for investment requires a broader, more holistic approach to ensure you can position your new holding for the best possible return.

To illustrate, I’ve looked at a couple of seemingly enticing locations with vastly different investment potential.

Be wary

It’s absolutely essential that you don’t simply rely on the numbers written in a contract when choosing an investment. It’s all well and good to find an affordable block of land and a reasonably priced build, but if you’re in an area with lousy growth potential (or worse, a chance of market retraction) then those cost savings will mean nothing as your equity retreats.

Take some of our mining centres for example. These regional areas were the darlings of growth during the resources boom – double-digit rent returns drove price gains. But they’ve proved to be an absolute roller-coaster of performance. You are in for either feast or famine with prices riding waves and troughs that can make even the steeliest-stomached landlord turn green with anxiety.

Mackay is a great case in point. It was loving high demand for rentals by FIFO mine workers during the 2004 to 2012 run, but anyone who tried to get in late was stung badly as the resources boom slowed and property prices crashed.

I see now that some ‘analysts’ are again predicting Mackay is in for another big market rise. These folks appear to be urging investors to take another punt on this regional city. I personally prefer more long-term stability in my markets.

Another interesting case study is in the corridor between Brisbane and the Gold Coast.

I was recently looking at the metrics for Pimpama – a well-located suburb just off the Bruce Highway that’s dominated by new house-and-land packages. Builders are smashing out four-bed, two-bath holdings to help feed the accommodation needs of commuter tenants.

This all looks fine on paper… until you dig a bit deeper.

One important measure of location for our company is the percentage of renters to owner-occupiers. The reason being that owner-occupier appeal helps drive price growth. If your suburb is awash with renter residents, then it’s values are prone to rise and fall on the waves of tenant demand. In contrast, owner occupiers like the types of fundamental drivers that will keep them in one place long term, meaning a more predictable market with greater price growth potential.

I recently checked the Pimpama renter ratio and it appears around 75 per cent of residents are tenants – well above the 30 per cent ceiling we use when selecting a location.

It’s not really that surprising given a high supply of land means prices are low. Perfect for selling to out-of-town investors from Sydney and Melbourne who are used to property within commuting distance of a CBD being priced well above $700,000.

So, to us, capital gains are unlikely to impress. This high level of stock also means rental vacancies are high too. Tenants are spoiled for choice and can move into a brand new property at very reasonable rents.

A winning location

In contrast, we have been actively investing in one Victorian location that ticks the right boxes. It’s a lifestyle suburb that’s close to the water and has easy options for those looking to get to the big smoke. You can jump on public transport and avoid the rush hour, or take the winding road to other employment hubs within the region.

Best of all, renters make up just 25 per cent of the population.

With these numbers in mind, we helped one client buy-in Stage 9 of a major development just 18 months ago. They paid $500,000 for a high-quality house-and-land project that was designed to appeal to local tenants and owner occupiers alike.

I’m pleased to say the development has now hit Stage 15, and identically designed homes on the same size block are selling for $610,000… and given what I know about the area, I’m confident this figure will continue to rise.

So confident, in fact, that I’ve bought one there myself.

So, don’t be tempted to use just half the available information. Take a big-picture look at all the data. Better yet, have someone with experience help guide you through the weeds of lousy locations and find a diamond suburb with great potential. It’s the best way to bring about maximum return via location, location, location.

https://www.linkedin.com/pulse/picking-locations-numbers-richard-crabb/

 

Richard Crabb | MD ASPIRE Network | PIPA Board Member
Author: Richard Crabb | MD ASPIRE Network | PIPA Board Member

QPIA® - Qualified Property Investment Advisor | Licensed Real Estate Agent - VIC: 082760L - SA: RLA 292544 - QLD: 3579879 |Diploma of Financial Planning |Active Property Investor | Board member of PIPA - Property Investment Professionals of Australia. Richard is the Founder and Managing Director of the ASPIRE Advisor Network. After an extensive career in corporate finance and through his personal investing experience, Richard identified the need to create a system and framework that supports ethical, independent property investment advisors who operate in the new property market. The ASPIRE Advisor Network now supports independent property advisors across Australia by providing their business engine and acquisition process, designed around concepts of future compliance in the brand new property sector. Richard together with the ASPIRE team has also developed a complete end to end software platform, which is leading the way to deliver property investment advice in the new property space. Our goal is to work with investors to implement their goals and objectives buying investment properties across Australia, utilising a structure and information-rich end to end experience.

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