Learning Center

Learn how to create and maintain wealth with solid financial planning principles and knowledge.

The Fundamentals of Investment Property

The Fundamentals of Investment Property

Friday 01 February 19

Property investments can be loved, endured or fled from. Investors have had all kinds of experiences with them. Perhaps you have had that experience yourself.

Given that investment properties can be either wonderful or a disaster, how can a person be reasonably confident of being on the “wonderful” side of the scale when entering into one? In a series of articles we will be seeking to answer that question.

Let’s begin with the fundamentals. What is it that makes property a worthwhile investment? It comes down to two factors: growth in value and income generated. In this article we will look at the first: growth.

Let’s begin with the fundamentals. What is it that makes property a worthwhile investment? It comes down to two factors: growth in value and income generated. In this article we will look at the first: growth.

PROPERTY GROWTH

What is it that makes a property grow in value, and more particularly, how can you pick out one that is likely to grow in value faster than some others? The value itself comes down to what residential property does for people: they need a place to live, shelter from the elements and a place to be comfortable in. They would like it to be close to all of those things that they are involved in from day to day, including work, school, shopping and recreation. Handy transport is vitally important, but in a spot that’s somewhat separated from having that transport run through their back garden!

Given that it’s not real easy to pick up a home and move it, those characteristics should also have an abiding character. A mining town may be booming, but then the mine either shuts down or decides to fly in the bulk of their workforce.

We can see that these things provide value. But what causes that value to increase in real dollar terms over time? Among other things, that involves supply and demand. They are the primary drivers of the price of anything, and as long as they stay constant, one would expect little change beyond inflation on the prices of things, including property. So, if you are in a small to medium sized country town that’s just holding its own – no population growth, no changes in employment, nothing new happening to change any of that – then you can expect that property prices are going to change little.

If, however, you consider a property with good access to a place where there are lots of jobs, people are continually moving in, new businesses are being created daily, good quality schools are available, there are ever increasing nice places to shop, then it’s totally different. That is creating increasing demand.

Should this area have a lot of vacant land around it and the government authorities are willing to zone it for housing development, then the supply will also increase. That being the case there will still be pressure on prices to go up, but that increase will be a function of present costs for infrastructure and construction. On the other hand, if not enough land is being released for development, or that land simply isn’t available in the necessary quantities, prices typically will be driven upwards, much more rapidly than inflation. The lack of supply and increased prices will also begin to make higher density development feasible. Furthermore, the entire character of the community begins to change with people desiring many of the amenities and the lifestyle that is associated with some higher density properties.

What can make the value of a property collapse? Naturally the withdrawal of those things that create demand will have that sort of impact. An employer closes up shop, people begin to leave and other businesses are shutting down. Not a pretty picture for that community, and horrible news for the owners of property in that location. Hence the need for a well diversified employment sector.

With an individual property there are other matters that can impact on its value. A tenant could virtually destroy it. It could disappear into a sink hole. A cyclone could transport it to the other land of Oz! Such matters can be managed through insurance, due diligence in property selection and quality rental management. Sometimes development approvals can help one property and hurt the one next to it.

Back to Learning Centre

Grace Financial Services Pty Ltd and James Massey are Authorised Representatives of HNW Planning Pty Ltd, AFSL 225216. Authorised Representative nos. GFS: 452765, James: 398841. Content of site may not be fully up to date as legislation and financial products are constantly changing. Any advice provided on this website is of a general nature not taking into account your personal objectives and situation. Such matters are important to consider prior to taking any action. Please make an appointment to discuss your specific situation so that appropriate advice may be given with regard to suitable products using current information.