Campbell Venning explains how to identify a strategic investment location based on a balance of cashflow and capital growth - balanced against the timing on the property clock.
31 May 2019
Clichés. By their very nature, clichés are things that we don’t bother to reflect on very often. But when it comes to buying an investment property, there’s one old cliché that’s rings true over and over again. Location, location, location. Get it right, and your property will start working for you right from the outset. Get it wrong and you’re in for a bumpy ride. It’s worth doing your homework on this one!
Whether it’s your first foray into the property market or you’ve been around long enough to see the property market move through its cycle multiple times, researching your investment location is paramount. Even with over 20 years of hands-on, hard-won expertise behind me, researching the location of investment opportunities is something I get stuck into on the ground. Things can look good on paper but you’ve got to press the flesh and check out the variables for yourself. I want to find out who else has invested in the location and what they doing.
What’s the rental demand and where’s it coming from? What are the vacancy rates? What’s the quality of tenants like? Economic drivers are going to guide your decision making. Are you looking for cashflow or capital growth? Currently Wellington, primarily a cashflow location, is experiencing unprecedented capital growth but that’s not the usual state of affairs. Areas of strong capital growth are typically low in cashflow and vice versa.
And of course, you want to assess where the location currently sits in relation to the property clock. With 12 o’clock on the clock-face representing a sizzling-hot market and six o’clock representing a market on the brink of recovery, your goal is to buy at the beginning of the growth cycle and sell coming into a market peak. The only way you can do that is by getting a good handle on what’s happening in that location right now. Markets can and do change rapidly so you need to keep your ear to the ground and your eyes on the clock.
You don’t want to buy just when the location’s about to pop. Everyone wants to buy at six o’clock, just in time to tap into a rising market, but to do that you have to ensure you’re looking to invest where the fish are swimming, which is not necessarily in the place you live or know or even like. Good investment decisions are driven by economics, not emotions!
In our business, we identify strategic locations based on a balance of cashflow and capital growth and time our investments in these locations to capitalise on the property clock. We use anecdotal market evidence to analyse locations against the clock and research the investment market drivers for that location including rental supply and demand, current infrastructure (and what’s planned or underway) and population growth.
Seasoned professional or green investors alike, the time taken to investigate a location thoroughly cannot be under-estimated!