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Think like an investor

Think like an investor

31 August 2016

hile it’s unlikely that experienced home buyers will buy a home to live in that they don’t like, the same is not true of experienced property investors. Yet many novice property investors report that they have difficulty buying something they don’t ‘like’ even if it is a sound investment.

Many investors make it harder for themselves than they need to by being unnecessarily emotional about their purchases. They see their investment properties as an extension of their own home and indulge in the same feelings of pride of ownership. It is not uncommon for novice investors to turn down a property with terrific investment potential and strong rental demand just because they themselves couldn’t live in it. Some end up buying what they consider to be a ‘nicer’ property, only to find that the tenants have different priorities and will choose more basic accommodation in order to be say, closer to amenities or to save on rent. Remember that many renters need to use public transport, and that the proximity of shops, schools and transport may weigh more heavily with prospective tenants than a flash kitchen. Not only that, buying something that you need to charge above median rent for may end up in increased vacancy as tenants (often saving for a home of their own) would rather economise now for benefits further down the track.

The strongest demand for both re-sale and rental is usually, by very definition, around the median price in any marketplace or location. Those who choose to invest in the luxury end of the market are usually the first to be hit by any economic downturn. Much of the luxury rental accommodation available is leased by corporations who, in poorer economic times, can no longer justify the cost of accommodating employees in high rent areas. And high income earners are unlikely to commit to large mortgages or rents in a climate of economic uncertainty with the possibility that salaries or jobs could be under revision.

Median priced properties - those in what you could call middle range of the market - are not as badly affected and usually give their owners the best long term return. If they lose some demand from their usual occupiers because young people move back home or families scale down to smaller or cheaper accommodation, they pick up tenants or purchasers who can no longer afford the luxury markets.