By Michael Yardney

While real estate agents will tell you the most important factor in choosing a good property is “location, location, location” this isn’t really true. There is a lot more to finding a good investment property.

Imagine we were back in 2003, the peak of a real estate boom, the Australian economy was performing well and the real estate markets on the eastern coast of Australia were charging along.

Let’s just say that you had $500,000 to spend and because you heard the catch cry “location, location, location” you decided to invest in the best real estate market you could find, in the best location you could afford in Australia.It is possible you would have invested in one of the eastern suburbs in Sydney, Australia’s largest capital, at a time when the real estate market was booming there.

Fast forward now to early 2008, just over 4 years later…

Your investment in the top location may still be worth about the same as you paid four years ago and if it was located in some of Sydney’s middle ring or outer suburbs it may be worth less than you paid four years ago.

On the other hand if you invested in Melbourne, Sydney, Adelaide or Canberra, your property would be worth a lot more than you paid for it. Had you invested in Perth or Darwin in early 2003, despite their real estate markets being in a slump at the time, your property would possibly be worth double what you paid for it.

So location alone is not enough.

When looking for top performing investment property I consider the following factors:

1. The stage of the property cycle - I try to play the property cycles by choosing a state that is in the upswing stage of its property cycle.

2. I then look for the right suburb in that state. I’m not a speculator so I don’t look for the next hot spot or the next fad.

What I look for is a suburb that has always outperformed the averages. These are not hard to find - simple research will uncover the top performing suburbs. These will usually be more established suburbs close to the CBD or the water.

3. Within those suburbs I look for the right locality. All suburbs have areas of better amenity and some areas that are not as “livable.”

4. Within those areas I find the right type of property. Some streets will always outperform others and in those streets some properties will always be more desirable than others and outperform as investment by increasing in value.

So what type of property do I look for?

These are the factors I consider:

1. I look for the type of property that will return above average long term capital growth. I ensure this by choosing the right location and right type of property in that area – one that will have enduring value. It must be the sort of property that will be in continuous long-term demand by owner/occupiers (because they are the main driving force for property values) and it must appeal to a wide range of tenants.

2. While many years ago I used to invest in houses, I generally prefer medium density dwellings – apartments and townhouses. These are now the favored type of dwelling by a larger percentage of the population. With our changing demographics, more and more people want to live near the city and if possible near the water in medium density dwellings. In other words in townhouses, units or apartments.

3. I avoid new properties because I usually have to pay a premium for these. The price of most new or off the plan properties generally includes a large mark up to account for the developers margin, marketing costs, agents commission, GST and so forth. This usually means there is little capital growth in the first few years. In essence I have given the first few years capital growth to the developer and it’s not his to have. So instead…..

4. I look for a property that allows me the opportunity to add value. This means I don’t just count on the capital growth in the area or the growth of the property cycle, but I can manufacture some of my own capital growth. I like to add value to my properties through renovations, refurbishment or total redevelopment into new apartments or townhouses.

5. The property must generate cash flow. While rentals are not my main criteria for investing in property, it is of course nice to have steady cash flow from your tenants to help subsidise your mortgage costs.

6. I look for the type of property that lenders are prepared to lend against. To maximize the return on my money I want to maximize my leverage. Lenders are keen to lend 80%, 90% or in some cases even 100% of the value of what they consider “well located” residential properties. However they will not lend as much against serviced apartments, commercial property and properties in regional areas or very small properties like studio apartments.I therefore avoid these types of properties to maximize my leverage.

7. I like my investment to be tax effective so I look for properties that allow me to have high depreciation allowances. These are of course non cash (money does not come out of my pockets) deductions that I can make at the end of the year to reduce my income tax payable. While new properties tend to have high depreciation allowances, they come at a premium price so I maximize my deductible allowances by adding value, refurbishing or redeveloping my investment properties.

8. Once I have found the right property I then need to buy it at the right price. While I understand that you make the bulk of your profit when you buy your property, I also recognize that this doesn’t mean you have to buy a bargain. It means you buy the “right” property by following the system I have just outlined.

While I don’t want to overpay, and I undertake thorough research so I understand local property values, I am not prepared to lose that special property by looking for a bargain.

My investment system has stood me in good stead over the years and my property portfolio has grown considerably. I suggest you incorporate these rules as part of your investment strategy and watch your own portfolio grow.

By following my system, you will lock in your profits by purchasing the right property. You can then maximize these profits by adding value to your property through renovation and redevelopment and you will realize your profits, not by selling, but through sensible re-financing, which will allow you to use the untapped equity in your property to buy further investments.

Michael Yardney is Director of Metropole – Property Investment Strategists, and a leading property commentator and publisher of Property Investment Update. He is also author of How to Grow a Multi Million Dollar Property - in your spare time and co author of All You Need to Know About Buying and Selling Your Home.

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