![\"Investment](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2023\/01\/investment-grade.jpg\")
<\/p>\nTypically, you need a budget of circa $1.5 million to purchase an investment-grade house (investment property) in Melbourne, less in Brisbane, and a lot more than $1.5 million in Sydney.<\/p>\n
Of course, not everyone can afford this budget, so I wanted to discuss how to buy the highest quality property possible within your budget.<\/p>\n
<\/p>\n
This blog will still be useful even if you do have a budget of $1.5+ million, as it will help you understand what \u201cinvestment-grade\u201d property means.<\/p>\n
Regular readers of this blog will know that I always adopt an evidence-based approach when making investment decisions.<\/p>\n
An evidence-based approach typically means adopting a rule-based approach.
That is, apply a set of objective rules to identify the asset\/s that are most likely to generate the future investment returns that you desire.<\/p>\n
The rules-based approach for investing in residential property involves ensuring a property has three important attributes.<\/p>\n
Properties that have these three attributes are typically considered investment grade.<\/p>\n
\u2018Supply and demand\u2019 is a basic economic concept that explains how many investments work.<\/p>\n
The goal of investing is to invest in assets that will generate good returns over very long periods of time.<\/p>\n
For example, an 8% p.a. return means your investment will be worth 10x in 30 years.<\/p>\n
Obviously, a 10x return will help you generate a huge amount of wealth.<\/p>\n
The most likely way to generate strong capital growth over very long periods of time is to invest in properties that are in finite supply and benefit from growing and excessive demand.<\/p>\n
When the number of buyers exceeds sellers, prices will rise.<\/p>\n
![\"Demand](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/06\/Demand-and-Supply-800x450.jpg\")
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Finite supply means that there is no vacant land within close proximity, which is why well-established, blue-chip suburbs are typically great locations to invest in.<\/p>\n
A dwelling\u2019s attributes can increase a property\u2019s scarcity too.<\/p>\n
For example, no one is building art-deco properties anymore.<\/p>\n
Apartment blocks constructed in the 1960s that only include 6 apartments are also very scarce \u2013 developers would probably build 20+ apartments on these blocks today.<\/p>\n
Excessive demand can be achieved by investing in property that the wealthiest 20% of Australians desire, as their incomes and wealth position (and future inheritances) will assist in pushing property prices perpetually higher, for the reasons that I have previously explained here<\/a>.<\/p>\n It is also very important that a property appeals to a variety of buyers such as families, professional couples, upgraders, downgrades, investors and so on.<\/p>\n You must not invest in an asset that only appeals to one type of buyer. This will ensure demand remains consistently high.<\/p>\n There\u2019s a common disclaimer used in financial services; past performance is not a reliable indicator of future performance.<\/p>\n Whilst that might be true for some asset classes and investments, often past performance can be a reliable indicator when analysing residential property.<\/p>\n The reason for that is that the factors that have driven prices higher in the past tend to be static and factual, which means they will be responsible for driving future growth.<\/p>\n Static means that the positive attributes that make a property desirable tend to remain unchanged for many decades.<\/p>\n For example, a property\u2019s proximity to (private) schools, arterial roads, shopping strips, and entertainment \u2013 these amenities tend to never move or change.<\/p>\n Therefore, if these attributes have driven demand for property over the past 3 decades for example, then it\u2019s likely they will drive demand over the next 3 decades.<\/p>\n Factual means these attributes are simply a question of fact, not opinion.<\/p>\n Conversely, the value of a share on the stock market, for example, tends to be influenced by the market\u2019s expectations.<\/p>\n Expectations about a company\u2019s profitability, growth, risk and so forth.<\/p>\n These factors can be highly subjective. However, with property, it\u2019s a question of fact.<\/p>\n For example, the suburb of East Melbourne is located close to the city so there are lots of entertainment options within walking distance.<\/p>\n Its proximity to the city makes East Melbourne a desirable location.<\/p>\n Therefore, unless there is evidence to suggest otherwise, a property's historic capital growth rate tends to be a reliable indicator of what you can expect in the future e.g., will the growth be above or below median growth?<\/p>\n It is wise to therefore investigate a property\u2019s historical growth rate i.e., what it\u2019s been bought and sold for over the past few decades.<\/p>\n Often, you can find what a property has been sold for online, or your mortgage broker\/advisor will probably have access to a database.<\/p>\n You really want to see a growth history spanning 20 to 30 years i.e., a period that covers many growth cycles.<\/p>\n I also suggest reviewing the historic growth rate of comparable properties located close to your target property e.g., next door, assuming it\u2019s a similar property.<\/p>\n This data set should start painting a picture to help you assess whether it\u2019s likely to be a good investment or not.<\/p>\n If the historic growth rate is lower than expected, it\u2019s a red flag.<\/p>\n A property\u2019s total value comprises its land value plus the value of the dwelling.<\/p>\n The land value drives the capital growth rate, as land in highly desirable locations appreciates in value over time.<\/p>\n To a large extent, the dwelling's value drives rental income. \r\n\r\n For example, a brand-new property will generally generate a higher rental return than an older property.<\/p>\n As I wrote\u00a0last year here<\/a>, investing in property is all about maximising capital growth, not income.<\/p>\n Therefore, to maximise your capital growth rate, you must maximise the land value component of your property i.e., spend more of your money on the land as you can always make improvements (upgrades) to the dwelling in the future.<\/p>\n This means avoiding newly constructed property.<\/p>\n Typically, the older the dwelling, the higher the land value component will be.<\/p>\n As I said at the beginning of the blog, you really need to have a budget of circa $1.5 million to buy an investment-grade house in Melbourne.<\/p>\n If your budget is lower than this, then I would advise you to buy a property that has the three attributes discussed above in as close to a blue-chip location as possible.<\/p>\n That is, start at the closest blue-chip suburb and investigate adjoining suburbs until you find a house within your budget.<\/p>\n Generally, you are better off to compromise on land and accommodation size before you compromise on location.<\/p>\n Therefore, if your budget isn\u2019t enough for a 3-bedroom house, then consider buying a villa unit, if it has the 3 attributes.<\/p>\n Or even an apartment.<\/p>\n If you are buying for investment purposes and find that your budget isn\u2019t enough to buy in a capital city, then you could consider investing in a major regional city.<\/p>\n Just be careful with this as some regional cities have experienced a lot of growth during Covid and may not offer good investment prospects over the next 5 to 10 years.<\/p>\n If your budget doesn\u2019t allow you to buy directly into an investment-grade location, then perhaps you can consider buying a property in a secondary location which you can improve to manufacture equity.<\/p>\n As soon as you have enough income and equity, you can then sell and upgrade to a superior location.<\/p>\n This is called a stepping-stone strategy.<\/p>\n The last bit of advice that I\u2019ll leave you with, is if you\u2019re going to spend a lot of money buying a property, then consider investing in professional advice i.e., a buyers\u2019 agent.<\/a><\/p>\nAttribute 2: Evidence of past growth<\/h3>\n
![\"Price](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2022\/12\/price-growth-800x450.jpg\")
<\/p>\nAttribute 3: Strong land value component<\/h3>\n
<\/div><\/p>\nStart with investment-grade locations and work your way out<\/span><\/h2>\n
![\"Location\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2021\/06\/location-800x450.jpg\")
<\/p>\nLeapfrog into an investment-grade location<\/span><\/h2>\n
Professional advice pays for itself<\/span><\/h2>\n