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Where to Invest in Real Estate

Investing in real estate can be a very secure way to grow your wealth. The housing market provides opportunities to acquire stable and tangible assets that should deliver solid returns over the long term when the right property is selected.

If you’re thinking about investing in real estate, where to invest will be one of the most important considerations. The location of your investment property will have a significant effect on a number of factors including median property price, rental yield, rental demand, fees and rates, capital growth, the quality of tenants and more.

When considering buying an investment property, there are a number factors you should consider to help you choose a location. However, what’s most important to remember is that this is not your home. You don’t need to fall in love with the property or the location. But you do need to do your homework and ensure that it will deliver a stable and long-term return on your investment.

To help you work out where to invest, let’s have a look at a few major factors to consider.

What’s your budget?

How much you can spend or the size of the loan you can access can, to a certain extent, affect where you choose to invest. If your budget is only $500,000 then you may need to discount the more expensive and trendy inner city suburbs, as that amount of money may not get you a desirable property in those areas. You may end up struggling to entice tenants or having to invest more money in repairs and renovations.

On the other hand if you have close to a million to play with, investing in the outer suburbs or a regional area may not deliver the kind of Return on Investment you’re looking for. If you have a larger budget to work with, you may even want to consider buying multiple investment properties across different locations to diversify your investment portfolio.

Whatever you can afford to spend, it’s important to align your budget with the investments in the correct locations.

What’s your investment strategy?

Your investment strategy will also have a significant effect on where you choose to invest. If you’re looking to generate good cash flow through high rental yields then you may want to go for low-cost properties in high-demand residential areas, and that could mean up-and-coming outer suburbs of capital cities. If you’re looking for capital growth while taking advantage of negative gearing, then investing in established or “blue chip” suburbs might be the way to go.

If your strategy involves investing in land or commercial property investment then that means you will be focusing on very different areas than you would for residential investment.

Clearly laying out your investment strategy ahead of time will mean you can narrow your search to those areas suited to your strategy and your asset type.

Understand the area

While home is where the heart is, when deciding where to invest it’s much more important to go with your head, not your heart. Just because you love a particular area or it has a hip and trendy reputation, doesn’t necessarily mean it will make the best investment.

Researching and understanding the area will help you to ensure that it will generate the rental income and demand that you want over the long term.

When researching an area, these are some key factors to look at:

  • Population growth
  • Median house/apartment price
  • Recent sales data
  • Employment/unemployment rates
  • Median income
  • Population demographics
  • Property taxes and council rates
  • Vacancy rates
  • Infrastructure investment
  • Proximity to public transportation
  • Proximity to amenities (e.g. schools, health care, shopping etc.)
  • Proximity to centres of employment

Any of these factors can have a variety of effects on the stability and viability of your investment. For example, significant upcoming infrastructure developments, like a shopping centre or public transport hub, could increase demand for properties in the area. On the other hand, an upcoming industrial development could discourage residential investment in the region.

When researching the area, it’s important to go beyond the facts and figures and try to talk to the locals. The council planning office is a good place to start to find out about upcoming developments. Speaking to local residents and business owners is a good way to gauge attitudes to an area and any developments or changes it’s facing.

The type of property

When considering where to invest, it’s also important to think about the type of property you want to invest in. In the case of residential property, this could mean a house, townhouse or apartment. Depending on the area, a house may be a better investment than an apartment, and vice versa.

In outer suburban areas with major housing developments, buying a house may be a bad idea since your house will be surrounded by a glut of similar properties, meaning supply could outstrip demand. Likewise, buying an apartment in a major high-rise complex also means your property will be surrounded by other identical properties all vying for the same potential tenants, which could decrease the rent you can generate and increase vacancy times.

The type of tenants

Since different areas tend to attract different types of people, the location of your investment property can have a large effect on the type and quality of tenants that the property will attract. The demographic breakdown of the area should give you an idea of who your potential tenants could be in terms of age, income employment and so on.

Have a think about who your ideal tenant may be and look for locations with this type of demographic. For example, if your ideal tenants are young, professional singles or couples, you may want to look at apartments or townhouses in trendy inner-city suburbs.

When it comes to commercial real estate investing, you still need to consider the quality of tenants you can attract. Commercial properties tend to have longer leases than residential properties. However, vacancy periods can also be longer and more costly for commercial properties. Finding the right commercial tenants can be difficult, so when considering locations for commercial real estate investment, it’s important to focus in areas that are particularly appealing to the commercial tenants you’re trying to target.

Invest in REITs

To avoid the issue of location, you can choose to invest in real estate shares. The easiest way to do this is through a real estate investment trust (REIT). These are investment products that give investors access to property assets. Australian REITs are known as A-REITs and are publicly listed on the Australian Stock Exchange.

REITs are generally low-effort and low-risk investments, and so can be a good way to invest in real estate and generate steady passive income without the hassle of purchasing and managing a specific property.

On the other hand, picking a REIT to invest in can be much like picking stocks. You’re choosing to invest in a business and the strength of your investment depends on how well the REIT is managed. Ultimately, if you want to be in charge of your investment and have a tangible asset to show for it, then real estate shares may not be for you.

Talk to the professionals

While the internet will be an invaluable resource for the early stages of your research, don’t forget to talk to the industry experts. Real estate agents and independent mortgage brokers and financial advisors can provide expert industry insights into the best locations to suit your investment strategy.

At Kruse Financial, we offer expert property investment strategies, advice, courses and programs designed to help guide you through the research process and get you ready to buy.

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