When you’re a property investor, every purchase is important. But your first purchase is the most important.
To understand why it’s vital you choose the best options when you’re a first-time investor, take a look at the most recent property investment data from the Australian Taxation Office (ATO), for the 2019 financial year.
The ATO found that: 71.4% of investors own just one investment property and 18.9% own two.
In other words, 90.3% of property investors never get past their first or second property and never build the sort of property portfolio that would allow them to retire early.
Why? Often because their first investment property is a poor purchase. That makes it hard to find the money required to buy subsequent properties, or qualify for the loans needed to finance a property portfolio, or both.
So it’s vital you choose the best options when you’re a first-time investor.
When you purchase an investment property, a rough rule of thumb is that about 80% of your long-term price growth and rental growth will be determined by the quality of the location, while 20% will be determined by the quality of the actual home.
Where you buy, then, is more important than what you buy – especially when you start investing. However, once you’ve chosen a location, the decision of what you buy can make or break your investment performance.
So before we explore the best type of investment property to buy, let’s focus on where to invest in property in Australia.
First, though, let’s bust a myth. Despite what you might’ve heard in the media, there’s no ‘Australian property market’, just as there’s no ‘Australian stock market’.
If you invest in Australian equities, you can buy shares in more than 2,000 different companies, which operate in different industries and report different financial results.
Similarly, if you invest in Australian real estate, you can buy property in hundreds of different markets around the country. For example, the Southbank market in inner-city Melbourne is very different from the Alice Springs market in the Northern Territory desert. As a result, all these different markets rise and fall at different times and for different reasons. And some of them don’t rise at all.
That’s why, as a first-time investor, it’s very important you think carefully about where to invest in property in Australia. Not all locations are created equal.
You can research locations yourself. Or if you want to make sure you find the best beginner investment locations, you can outsource this challenging task to an experienced buyer’s agent. Either way, the best place to invest is in a location that’s likely to have a diverse, sustainable economy over the long-term. That way, you’re likely to maximise your price growth and rental growth over the decades to come. Here’s why-
People want to live where the jobs are, so if your investment property is located in an area with a consistently good economy, it will consistently be in demand by owner-occupiers (which will put upward pressure on prices) and tenants (which will put upward pressure on rents)
The stronger the local economy, the more money the council will have to invest in services and amenities, which will also stimulate demand by owner-occupiers and tenants
So where are these diverse, sustainable economies located? You can find them in parts of Sydney, Melbourne, Brisbane, Adelaide, Canberra and Hobart. It’s more challenging to find diverse, sustainable economies in Perth and Darwin, because those cities are heavily tied to the resources industry, which tends to operate in boom-bust cycles.
You can also find diverse, sustainable economies in parts of regional Australia. As with the Perth and Darwin examples, it’s generally best to avoid investing in regional communities that are heavily dependent on one industry, such as mining, agriculture or tourism, because a prolonged downturn in that main industry could devastate the local economy.
To repeat the point made earlier- not all locations are created equal. That’s why instead of investing in all of Sydney or all of regional Australia, you should focus on select pockets. In Sydney, for example, an affluent market like Double Bay is very different from a working class market like Campbelltown; in regional Australia, a diverse community like Ballarat in Victoria is very different from a resources community like Karratha in Western Australia. So choose wisely.
With all that in mind, here are some locations that, as of April 2022, are among the best options for a first-time investor-
Investment help for beginners – best type of investment property to buy
Once you’ve identified where to invest in property in Australia, your next challenge is to think about the best type of investment property to buy.
So, are the best beginner investments likely to be houses or units?
The answer is houses, if data from the Australian Bureau of Statistics is anything to go by. Over the 15 years to December 2021, median prices throughout Australia increased 110.0% for houses but only 82.2% for units.
That doesn’t mean an apartment can’t be a good investment. It just means that history suggests the average house is likely to outperform the average unit.
That’s why the table above, showing some of the best places to invest right now, focuses on house markets.
But just as not all locations are created equal, not all houses are created equal. The best beginner investments tend to be houses that can be rented out immediately, require minimal upkeep and have strong resale potential. So, as a first-time investor, some of the questions you need to ask yourself when looking for a house include-
Building and pest inspections will allow you to check for some of these potential problems. For the others, you’ll either need to engage an expert buyer’s agent or conduct your own thorough due diligence.
We spoke earlier about the importance of buying a quality property in a quality location when you’re a first-time investor.
Sadly, many investors don’t. Instead, they buy properties that-
As a result, evidence suggests that about half of all Australian property investors sell up in the first five years, either from despair or because they can’t afford to retain their property.
Those investors who do retain their property find it hard to buy another because-
If your first investment property has low or negative capital growth, it probably won’t generate the equity you need to fund the deposit on another property
If your first investment property drains your cash reserves, it will be hard to finance another mortgage
Conversely, if you choose the best place to invest and purchase the best type of investment property, you’ll be in a much better position to either save a new deposit or use the equity generated by your first investment property to fund the deposit on a second.
And if you continue to buy quality investment properties in quality locations, you can keep repeating this formula. That, in turn, will give you the chance to build a wealth-generating property portfolio and retire early. Plus, you won’t actually need as many properties as you may think.
Property investing is not a get-rich-quick scheme. But if you get it right, it can help you build life-changing wealth over the long-term. That’s why, when you start investing, it’s so important to make smart choices.
If you want to know where to invest in property in Australia, or if you want to buy the best type of investment property in a location of your choosing, you should seriously consider getting expert help from a professional buyer’s agent. That way, you will give yourself the best chance of succeeding with property investment.