The key to capital growth in real estate

I have a real issue with property spruikers claiming to know the next hot spot, the inference being that if you buy in these areas you will automatically be making a great investment decision. Particularly as there are so many would-be investors who are trying to identify the next big location in their hopes of striking real estate gold.

The thing that is so rarely talked about the risk. Now don’t get me wrong, there’s a time and a place for taking risks in the hope of big capital gains. But this is the realm of serious investors who are educated and experienced (or pay for advice) and who already have substantial equity to back them up. It is not an investment strategy that we advise for first-time investors  or those with a large debt to equity ratio.

There are two main elements to capital growth. There is the location and there is the individual property. Many people providing property investment advice will focus on buying in the next hotspot to the point where the actual piece of real estate becomes secondary. In fact, many of their clients purchase property sight unseen, with decisions made solely based on “the numbers”. We believe that this is the riskiest strategy of all as every suburb and town has a median growth rate, which means that 50% of properties in that area will under-perform. If you are not focused on the actual property and the attributes then you run a very real risk of missing out on the opportunity for good capital growth, let alone maximum returns.

The thing that I love about buying real estate is that one one hand it is so simple, the fundamental principals are pretty basic. But on the other hand, it is a very complex game, largely because human beings are involved and we often have to be quasi-psychologists to make sense of it.

One of these fundamental principals applies to capital growth. It is this simple: for a property to grow in value above the median rate for the area it needs to appeal to buyers. So the key to capital growth is understanding what sells well. I spent many years as selling agents, and we have stood at the front door of open houses and dealt with often brutal buyer feedback, or lack of feedback as the case may be. As a result, we know what sort of property sells well. And we can see when there are simple ways to create buyer appeal as opposed to features that cannot be changed. And we can also see when buyers are being seduced by great presentation and overlook a property’s down-sides.

For this reason, when we are providing property investment advice to our clients, we firstly cast a fairly wide net in terms of location (within our preferred 10km radius of the CBD) and then actively seek the best opportunities within that area. And what makes a good opportunity comes down to the actual property and it’s future saleability.

There is little benefit in filling your head with statistics about projected population growth, infrastructure development, job creation projections etc in order to determine WHERE to buy if you make mistakes in choosing WHAT to buy.

 

 

 

Published:- 23 March 2012

DISCLAIMER:

Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

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