Honing in on the right location

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We've all heard the cliche that ends with location, location, location.

What we've heard less of is the discussion to help determine exactly what is meant by location.

Truth is, location means different things to different people. To the elderly it might mean a quiet alcove in a quiet suburb, and to those dependent on public transport it might mean being on a busy street with easy access to buses and trams while young people might regard a bustling inner city location as the perfect address and many parents will first check out the schools before settling on the suburb.

Different people have different needs and it is whether or not a location panders to a particular set of needs that makes a location perfect for a specific individual.

But the definition I'm interested in is what makes a perfect location for a property investor. Before I answer that, another question needs to be asked - why are you buying an investment property? In my experience it always boils down to one major reason - to make money. If that's not true for you then you're reading the wrong magazine, so if we can agree that the purpose of buying an investment property is to build your wealth portfolio, the onbvious next question is how is this investment property going to grow your wealth?

There are only two ways an investment property will enrich you. The first is through the income it will generate via rent and the second is through capital growth. Rental income only happens if the property is positively geared, that is, if the rent being generated exceeds the mortgage repayments. If it doesn't, then the property is negatively geared, which removes one of the pillars of my wealth generation strategy.

Quite simply I don't believe in negatively geared investment properties and if that's the only way to add a particular property to your portfolio then I'd be inclined to regard the property as not being in the “right location”. The only exception, of course, is if the property is in an area with proven capital growth, because the second pillar of the astute property investtor strategy is capital growth, or the money you make when you sell the property with your profit represented by the difference between how much you paid for the property and how much you sold it for.

A conventional rule of property investment dictates you make money either through the agency of cash flow positive properties or via capital growth, but not both.

And that is where my definition of location for property investors comes in, because the properties I invest in and in which my clients invest in defy conventional wisdom by being both cash flow positive and generating substantial capital growth.

Here's the secret. An investment property needs to be located where there is plentiful high-end demand for rental properties. The high demand pushes up rents and the higher the rental return the greater the value of the home and the higher the value of the home the less likely renters are to commit to buying one and continue paying the high rents. It is a perfect storm for property investors but it is also a delicate balancing act because very quickly high end demand can evaporate like so much dew on a hot desert day and all you're left with is a mirage of investment properties.

If I may coin a new cliche it is that research, research, research will determine location, location, location. Remember it's not only who you know but also what you know, so get knowing!

Paul Bieg

Director - BIG Property Investments

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