Property Investment: It’s Not About You
Why you should follow your head, not your heart, and not let emotion cloud your property investment decisions.
You’ve decided to buy an investment property. You’ve done a bit of research online, you’ve seen a few floor plans, you’ve checked a few properties out in your favourite area. There’s one property in particular that just seems to be speaking to you – you love the features, and something about it has seduced you. You can’t quite put your finger on it, but your gut is telling you that it’s ‘the one.’
Wait, hold up. What does your gut know about investment properties?
Generally speaking, that ‘gut feeling’ that you get isn’t some higher power speaking to you about the qualities of the investment, or an instinctive perspective that suddenly puts you in tune with the in’s and out’s of the investment market (unless, of course, you’re an experienced investor with a wealth of experience in the property market). More than likely, that gut feeling is excitement, or fear. However, as much as it seems fairly obvious that investment decisions should come from the head, not the gut, people have the funny tendency to act a little, like… well, human beings. And although we like to think we are rational beings, we are in fact proven to have hundreds of proven biases, which affect our day-to-day decision making (just ask Daniel Kahneman, who won a Nobel Prize for his life’s work on cognitive bias).
What affects your decision making?
So, how do you ensure that you are making a rational investment decision, not plagued with emotions and bias? The first step, is to honestly ask yourself why you are investing in a property. It could be for a few reasons, each of which have their own set of factors affecting the decision-making process.
One reason is when someone is buying a second or third house with their future lifestyle in mind. These investments are not usually for the purpose of generating wealth, but more for securing of an asset for future personal use. One common scenario is for people to invest in a property in an area which they have recently enjoyed a holiday. However, investments in holiday zones can be tricky – they are often seasonal areas which are difficult to rent in the times when the investor themselves doesn’t want to use the property. Aside from holiday zones, investing in areas which you yourself want to live in the future only factor in one person – you. Not, as should be considered, the tenants who will rent your property and provide an income for the years before you decide to utilise the property yourself. As a result, the potential for return on these investments can often be very low.
Another reason to invest in a property is to generate and accumulate wealth, often planning for retirement or looking to build a property portfolio to work towards financial independence and freedom. If this is really the case, it should be easier to separate emotions and think in terms of numbers and return on investment. However, emotions still come into the equation, and it can be easy to become enchanted with an inferior property because of how you feel about it, instead of buying an investment property that future tenants will want to rent. Which brings us to the second important question…
What makes for a good investment for future tenants?
You’ve heard the old adage – the three most important factors in determining the desirability of a property are “location, location, location.” Well, whilst other factors definitely contribute to an investment properties desirability, location is certainly the number one factor. Locational factors taken into consideration should include:
- Proximity to public transport and major transportation nodes: Consider what your target demographic needs. The ability to easily catch public transport to work and leisure activities is a major drawcard. Vehicle facilities, such as easily accessible major roads and availability of car parking spaces are also important, though be wary of being situated too close to major transport routes, for the noise disturbance factor.
- Proximity to infrastructure and amenities: Prospective renters will want to ensure that shopping centres, sporting facilities, and other useful amenities are located nearby. Educational facilities are also extremely important – schools are a major determining factor for families looking to rent a property, as parents will look to rent a property in a specific catchment zone to get their kids into a good school. Domains School Zone feature is a great way to see which catchment area a school falls into!
Lifestyle factors are closely related to the location. Aside from essential amenities, what does the area have to offer prospective renters? Lifestyle factors to consider depend on what type of tenants you want to attract; young professionals are likely to want to be close to the coast, bars, and cafes, and families are often inclined to rent nearby green areas, such as natural corridors (like nature reserves) and leisure zones (parks and ovals).
This one is relatively easy. If you yourself were looking to rent a house, which features would make the house more desirable to you? Aspects to consider include:
- The obvious – is the layout of the house functional and flow smoothly between rooms?
- How many bedrooms does the house have, and are there enough bathrooms (for a 3-4 bedroom house, more than one bathroom is essential).
- Is there adequate storage space? Check for built-ins and other handy storage solutions.
- What kind of inclusions does the house come with? Dishwashers and washing machines are just few examples of inclusions that make a choosing a property much easier for future tenants
There are multiple financial aspects that need to be considered before selecting and purchasing an investment property, all which benefit from a non-emotional attachment to a property. Important questions to consider include:
- Does the area have a low vacancy rate?
- What are the long-term capital growth prospects?
- What are the market and price trends within the area?
- What growth indicators does the area have?
What do we offer at IPP Australia? Our services are tailored to you, helping you find the perfect property investment for your individual situation. The best part? If you don’t proceed with the property purchase, you will never be out of pocket – that’s our guarantee.
If you’d like to get some individual advice about how to choose the right investment property, please get in touch with us at firstname.lastname@example.org, or schedule a call or appointment via our simple booking system.