It always surprises me when I have clients come in to my office who are interested in purchasing an investment property but have failed to do their due diligence.
Property is one of the biggest purchases you will ever make in life, so get out there do your due diligence and get educated. I guarantee that if you were about to buy a business for $500,000 you would go and do your research. It’s no different with buying property. When buying an investment property there are a number of key components you must consider before you buy.
Understanding supply and demand
Firstly there’s supply and demand. Above all, having a basic understanding of the economic principles of supply and demand can help you decide the best time to buy property. You can usually expect a drop in prices when there is an over-supply of homes or land in a given area. When the demand for property is high but property is scarce, prices skyrocket and it becomes a seller’s market.
Why do prices rise?
Scarcity. Scarcity causes prices to rise as there isn’t enough land or if there isn’t enough homes in a given area. Even if land is available on which to build more homes, the time it takes to construct them cannot meet immediate property needs, so demand will remain constant or rise. It’s important to understand how demand and supply work in correlation.
Understand the area you are buying in
Secondly, you must understand the area you are buying in. Is it a high growth area, greenfield location? Ask yourself, why would people want to live in this area? There may be new infrastructure being built in the area such as schools, transport, shopping precincts, education institutions or hospitals which appeal to people. What’s the reason for demand in the area? I see too many people buying property without thinking clearly about why they want a property in a particular area.
Thirdly, is understanding the type of property you want to buy and why. Is the property negatively geared, neutrally geared or cash flow positive? Gearing simply means borrowing money to buy an asset. In the case of property, you have taken out a loan to purchase a property.
Understanding negative gearing
So, negative gearing means that the interest you are paying on the loan is more than the income. As a result, you are making a loss. Neutral gearing means that the interest you are paying on the loan is equal to the income. Positive gearing means that the interest you are paying on the loan is less than the income. As a result you are making a profit.
I’ll explain more about how all of this works in the video below: Check it out!