Buying Land & Building for Investment Purposes? Scarcity vs Investment Grade Real Estate.
The 2nd most Common Mistake Made in Real Estate Investment Portfolios
In the last one-minute mentoring video and blog, we discussed the number one most common mistake made when building a property investment portfolio. Today, we are diving into the second most common mistake – neglecting scarcity in property real estate. The aim is to give you quality industry knowledge to help you make the right choices when buying land and building for investment purposes. The same tips can be applied to buying existing property as well.
What You Need to Know to Grow the ROI from Your Property Investment Portfolio
Scarcity in real estate (along with owner-occupier purchases driving up value) is a critical driver in strengthening property, land prices and future return. Scarcity is directly linked to supply and demand. When more people are wanting to move into a suburb than there are available houses, prices go up(*1-3).
Scarce property is generally in a more favourable location, the house quality is good and access to well-established transport routes, schools, and lifestyle options (such as green spaces, the beach etc) are all within arm’s reach(*1,2).
Investment Grade Real Estate
Where you won’t find scarcity and strengthened pricing is in large-scale developments. These are developments that owner-occupiers would prefer not to live in if they can avoid it.
Why? Because the quality, design, dimensions, orientation, and locations of these estates are built with the rental market, investors, and on occasion, first-home owners in mind. Furthermore, they are often bordered by further land releases and developments which makes them abundant, not scarce.
Investment Suicide
Investment suicide is a term we refer to when an investor snaps up a cheap property for rental income without proper future planning.
Investment-grade homes with minimal capital growth but which produce some rental income can be traps for investors. The issue is the rent collected maybe $300 per week which may be fine for right now. However, over the long term, by accepting the capital growth will be minimal, the investor is also accepting that the rent price increases will also be minimal.
What will continue increasing in price are the ongoing maintenance costs which can see the property produce negative cashflow.
Negative cash flow is the absolute last thing you want during retirement.
When an investor buys a property for its rental income, they must ensure that it is expected to have some capital growth. The value of the home must be able to cover the ongoing costs of the property over time. A cheaply built home will likely have more ongoing costs than a quality-built home – however, the quality-built home may not be as cheap to purchase.
Don’t Forget to Consider Owner Occupiers
When building your property portfolio, always look at the future potential of a property, the suburb, and the region it is located in. Cookie-cutter developments lack street appeal, space, and character – which are all things owner-occupiers look for.
As mentioned in the last blog, owner-occupiers hold around 70% of the market. As an investor, you want some owner-occupier activity in your suburb because they are the key to driving up property value – and thus rental prices.
Putting the Pieces Together: Owner-Occupiers Driving Prices Up and Scarcity
The two learnings from the top mistakes made when building a property portfolio combine to become key conditions when considering the true value of a property. If you can keep these two mistakes/learnings in the back of your mind, you will always be guided towards high-quality investments.
Get Help Putting the Pieces Together and Building Your Future
As there are a multitude of factors in property investment and real estate, it can feel overwhelming and daunting. To talk through your property goals and make a property plan that you can be confident in, talk to the friendly professionals at Mentor1 Property.
Book to talk to our friendly team today!
Call: 1300 765 811. Email: info@mentor1property.com.au
References *1. Mentor1 Property. Why People Don't Succeed in Real Estate PT 1 - 1 Min Property Mentoring. Sydney, NSW. YouTube video. 2023. *2. Canstar. Building Vs Buying a House - Pros and Cons. 2022. *3. SF Gate. How Much Do Homes Increase in Value in 10 Years? 2021.