By Rohan Taylor –Director of Financial Services at Blackburne Finance & Investments
Location, location, location – it’s what we’re told when it comes to property investment. Find the right location and even having just one well-positioned property in your portfolio can set you up for life…
The part they don’t tell you is how to evaluate a property location from an investment point of view… so that’s what we’ll cover today!
There are only three factors that have the most bearing on a property location’s performance…
First: Cash Flow. We list this first because it can have the greatest immediate effect on your lifestyle. If a property is positively-geared (rental income covers all expenses), then it results in extra income each week. If a property is “positive cash flow”, then it means you are financially better off once you factor in depreciation and other costs that you can get a tax deduction for – you still end up with more cash in your pocket each week.
Positive cash flow properties are excellent for your lifestyle.
On the other hand, most Australians who’ve become wealthy through property have done so with “negative cash flow” properties.
Because even though they’ve needed to spend more money each week on their property, the long term capital gains have been solid. Think of it like compulsory saving… but instead of saving $30 a week, or $1500 a year, the growth in the property means you’re actually gaining tens of thousands a year.
Which brings us to the second important factor – Capital Growth.
Capital growth is incredibly important, because investors usually don’t get rich from the cash flow a property provides. They get rich from the growth in their portfolio. And that means finding the right locations that are more likely to experience significant capital growth is absolutely paramount.
There are many indicators of capital growth. Past performance of a particular suburb, what neighbouring suburbs are doing, supply and demand projections (local population growth versus building approvals), infrastructure spending and some investors even consider auction clearance rates to be significant.
At Blackburne, we have an entire research department who are constantly reviewing data on various property locations throughout Australia to find the best spots. It’s a huge job because there are so many factors to consider… and it also means we need to spend a lot of time analysing the third factor in property location spotting: Risk.
Risk analysis is incredibly important when it comes to property locations. Capital cities generally offer lower risk, but even they have their cycles and there can be very bad times to buy in a particular city depending on how the market is performing there.
At Blackburne, we tend not to look for the “get rich quick” investment properties (you know… the ones offering extremely high cash flow and understated risk factors). This is especially popular in mining towns and our advice there is very simple: proceed with EXTREME caution.
We’re more interested in creating long term, sustainable, (relatively) predictable wealth…
… and that means performing very careful analysis for any property location of all three critical factors: cash flow, capital growth and risk.
Not a single property in Australia has amazing cash flow, amazing capital growth potential and zero risk. No property is perfect in all three respects. Which property you decide to purchase will require some compromise, and that means determining which factors are most important for you.
And it’s worth noting that it can actually be MUCH riskier to purchase property near where you live…
As I mentioned in last week’s email, diversification is the key to minimising risk across your portfolio, without compromising cash flow or capital growth prospects.
And those property investors who are the most successful are able to achieve solid wealth because they understand property locations and they perform such thorough research… or have Blackburne do it for them!