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Choosing the neighborhood for your investment property

If you are shopping around for an investment property to purchase but don’t know what to look for, here’s a tip.  It’s about much more than the bricks and mortar or the look and feel of the place.  You need to look outside the square, and by that, I mean go beyond the four walls and the front gate.

What the neighborhood has to offer is starting to mean a lot more for prospective tenants than the number of bathrooms, floor space and fit-out.

It’s an over-used real estate line that the three things that matter in property are ‘location, location, location’, but in a sense, there’s some truth to the saying.  We are not talking about location in terms of does the apartment have water views, or is it in a fashionable suburb. We are talking about location in the sense of what facilities does the locality provide for the people who live there.

The number one facility to consider in choosing your investment property is public transport.  The list starts with access to a train line.  The reason it starts here is because heavy rail can give access to a wider range of jobs in the same travel time-frame as other forms of public transport, and future tenants of your property will value that.

Of course, it’s even better if you can then look at a multi-modal outcome, where you have train, bus and even light rail connection because that provides people with greater options for shopping, lifestyle and for work.

If there is good public transport connectivity, then there’s the potential for reducing the number of car spaces required on site or perhaps no car spaces will be needed with your investment property.  Even from a tenant or owner-occupier point of view this has advantages.  It can allow you to live with a single vehicle or no vehicle, which is a substantial financial and lifestyle saving. Our research shows rental premiums of 10-20 percent for high access to public transport.

After transport, the next item on your list should be ‘walkability’.  What is within walking distance?  Is it possible to walk to do the daily shop, or the weekly shop, or even to go shopping for goods other than groceries.  These days’ people are shopping two and three times a week and being able to do this without having to drive and park is a great convenience, and desirable for health reasons too.

Education is critical for young families. Our research shows that people will pay 10% to 15% more to live in areas with access to quality education. Walkability to a range of non-retail amenities is the next thing to think about.  These amenities might be parks, or churches and other social institutions which are valued by different groups.  In Sydney and Melbourne, for example, there are ethnic groups who wish to live close to the religious and cultural buildings they frequently visit and are prepared to pay for that proximity, so bearing this in mind can be a good investment strategy.

Now that there’s a lot more plain vanilla rental stock being built by developers, astute investors need to look at obtaining property with an edge over the run-of-the-mill, so they are not just competing on price points for a minimum yield.

Instead of focusing on affordable rental prices, we need to start thinking about affordable lifestyle.  In Sydney, developers have started to build down the Parramatta road corridor and there are apartments in places with few amenities and not close to public transport.  If you don’t have to factor a private car into your living situation, then you can afford to spend an extra hundred dollars a week on rent.

Another thing that has changed is the broader mindset of renters.  In the past, renters would start looking for a property with a certain sum of money in mind based on saving a portion of their income for a future home purchase.  They would just keep searching further out from the city until they’d find a place that fit their rental budget. We’ve shifted into an era now where there are more people in the market who are long term renters. Over the past five years we’ve seen many young professionals prepared to pay a lot more in rent because they think they’ll never buy and figure they’d like to be comfortable today.

We are seeing market segmentation occur and the question for property investors is: which market segment do I shoot for?


About the author: 

Brian Haratsis is MacroPlan’s Founder and Executive Chairman. Brian is an economist and future strategist with over 30 years experience as an advisor to governments and major corporate clients throughout Australia and New Zealand. For more information or to discuss your property research requirements, please contact Amy Williams on 02 9221 5211 or amy.williams@macroplan.com.au.

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