Why its not always a good idea to buy an investment property where you live
We all love our own neighbourhoods, right?
We choose to rent or own homes in particular suburbs because it’s close to where we work, it may have an exciting entertainment scene, or perhaps it’s in the right school zone for our children.
But does that mean that you should invest in your own backyard, too?
The thing is, far too many beginning investors do just that when they start out.
Their thinking is: Well, I love this suburb so everyone else will as well!
But this isn’t necessarily true and here are some reasons why…
Choose your sources wisely
You’re likely to invest in your own backyard because you’re biased towards it.
Confirmation bias is the natural human tendency to seek or emphasise information that is confirmatory of an existing conclusion or hypothesis.
But in my view, confirmation bias is a major reason for investment mistakes…
In order to minimise the risk of confirmation bias, we attempt to challenge the status quo and seek information that causes us to question our investment thesis.
Make sure you check multiple information sources to ensure that the conclusion you’ve reached is truly correct (and is not just the information supporting your personal belief).
Make a distinction between where you live and where you should invest.
In many cases, where you want to live geographically and what type of property you want to live in may not be a great choice for a long-term investment property.
That’s often because your home suburb has been chosen for emotional reasons and we all know that investing should be about using your head and not your heart.
Strategic investors know to dig deeper than the average investor.
They are always on the lookout for investment-grade properties that are going to outperform the averages – and that will probably mean investing in locations other than their home suburb.
In fact, smart investors often look in other states when searching for their next property.
A top-down approach to investing
The property investment system that has helped me build a very substantial property portfolio and that we recommend to all our clients at Metropole uses what we call a top-down approach.
- It starts with buying at the right stage of the property cycle. I look at the big picture – how the economy is performing and where we are in the property cycle.
And we’re currently only one year into this new property cycle which began in early 2023. - Then I look for the right state in which to invest – one that is poised for economic growth because this will lead to jobs growth, which leads to wages growth and population growth which eventually leads to property price growth.
Currently our property markets are very fragmented and some states are performing much more strongly than others. - Then within that state, I look for the right suburb – one that has a long history of outperforming the averages and one that will continue to do so because of its demographics.
I look for affluent areas where the locals can afford to and are prepared to pay a premium to live there.
These tend to be the established “money belt” inner and middle-ring suburbs of our capital cities or suburbs that are gentrifying.
Hybrid work practices are here to stay meaning more of us will be working from home at least part time.
This means gone are the days where our ‘home’ was simply the place we rest our heads and enjoy some downtime between work and our social lives – the coronavirus social distancing has put an end to life as we once knew it.
If social distancing and the Covid-19 environment have taught us anything, it has taught us the importance of the neighbourhood we live in.
If you can leave your home and be in walking distance of, or a short trip to, a great shopping strip, your favourite coffee shop, amenities, the beach, or a great park, the recently implemented coronavirus restrictions might seem a little more palatable than if you had none of that on your doorstep.
That’s why choosing the right neighbourhood is important for property investors.
In short, it’s all to do with capital growth, and we all know capital growth is critical for investment success, or just to create more stored wealth in the value of your home.
Sure there is always the opportunity to add value through renovating your property or making a quick buck when buying well.
But these are off’s and won’t make a long-term difference if your property is not in the right location because you can’t change its location.
This is key because we know that 80% of a property’s performance is dependent on the location and its neighbourhood.
In fact, some locations have even outperformed others by 50-100% over the past decade.
And it’s likely that moving forward, thanks to the current environment, people will place a greater emphasis on neighbourhood and inner and middle-ring suburbs where more affluent occupants and tenants will be living.
These ‘liveable’ neighbourhoods with close amenities is where capital growth will outperform.
Not in my backyard
Hopefully, by now you can see that investing in your own backyard is usually not the best investment strategy.
That’s because there are many other locations across Australia that can provide investors with opportunities to buy a property with better chances of achieving above-average capital growth in the years ahead.
While successful investing is all about strategy, it is also about considering all options and owning a geographically diverse portfolio so you can make the most of market “ups” and protect yourself during any “downs”.
That way, market conditions are almost irrelevant because there is always somewhere in a country of our size where opportunities are ripe for investment picking.
