When purchasing an investment property, buyers are often at a crossroads, weighing up factors such as location, capital growth and the total value of the asset.
According to Custodian Managing Director James Fitzgerald, too many investors buy with their heart and not their head, causing investment properties to flop as buyers fall in love with the aesthetic of a property without treating it like a business.
“It doesn’t matter how much you love a house, the value of the actual building itself will go down as it ages and your maintenance costs will increase,” he said.
Mr Fitzgerald highlighted the importance of purchasing a property due to the land and location benefits, as land appreciated while buildings depreciated.
“The single most important factor to consider when buying an investment property is what is going to give you the best capital growth, and the one asset which will do that is land,” he said.
“It’s great to derive a good rental income and tax deductions along the way, but the way you will really build wealth through property is for it to grow in value.”
With land comes suburb location – another factor Mr Fitzgerald recommended investors look into.
“Suburb location is one of the most important factors when purchasing an investment property,” he said. “You want to be investing in an area that has population growth, as well as jobs and infrastructure.
“That means demand for housing, and over time a transition to denser living which pushes up the value of land.”
Space Real Estate Director Justin Davies has a similar outlook on the value of land and suburb location.
“We can’t make more land, so land increases in value over time, while buildings depreciate due to wear and tear,” he said. “However, depreciation is not a dirty word – it can actually be very helpful to property investors as a great tax deduction that can increase your cashflow.”
Mr Davies said he had noticed a reoccurring phenomenon where a highly priced suburb would eventually increase the value of neighbouring suburbs.
“A rule of thumb for many investors is to look at suburbs that are relatively cheap when compared to neighbouring suburbs,” he said. “We are seeing this at the moment with City Beach and Wembley Downs, Claremont and Mount Claremont, Mosman Park and North Fremantle.”
Mr Fitzgerald explained the importance of buying in a newer area to create better cashflow predictability.
“Maintenance costs on older properties are impossible to predict, and it’s not uncommon to get a bill for $5000 to $15,000 for maintenance works,” he said.
“You can’t have that risk if you’re wanting to build a portfolio of multiple properties. If you receive two or three of those bills, it’s game over from a cashflow perspective.
“As investors, we want an asset that will grow in value and also give us cashflow. In terms of balancing the two, it tends to be like a fulcrum – you can’t have growth without sacrificing cashflow and the opposite is true.
“Therefore, it’s important to get the balance right. The best way to ensure strong cashflow is to buy new – you minimise the costs and hassle of maintenance.”
The type of building doesn’t make it any more or less viable, it just depends on your investment strategy, according to Mr Davies.
“In the COVID-19 world, Perth’s safety profile is world class, and we are seeing people from all over the world relocate to Perth,” he said. “The right type of property to invest in depends on your strategy, as apartments can be great for cashflow whilst houses typically achieve capital growth.
“At the moment, both apartments and houses are showing quite compelling investment returns, with rising rental prices and low borrowing costs. There aren’t many properties that can’t be positively geared at the moment.”