Building a successful property portfolio comes down to many factors, but perhaps none is as essential as investing in the right locations.
As they say, location location location.
Investing in your own neighborhood has a high level of desirability for a lot of new investors because of the allure of familiarity.
Knowing the ins and outs of the area you live in is great because you know first-hand where the best streets, houses, and amenities are located and therefore can make educated decisions on which properties make the best investments in that area.
Although that is true, there are a few important factors to weigh up before investing in your own backyard.
There is an emotional attachment to buying your own home and this is the big drawcard for first-home buyers - they want to feel like they can live in a home, not just a house.
For investors, investment decisions should be made on numbers & evidence-based research, not on emotional attachment.
It's highly likely that potential investors have an emotional attachment to the neighborhood they live in and it can be hard to break that, but consider the following factors before making an investment decision.
Diversification
Diversification is a simple, but extremely important concept. It works on the premise that picking winners is fickle so by spreading your investments across the country and across a range of typologies you will get more consistent and greater capital appreciation, and rental return.
Each location around the country is influenced by its own market factors so when the economic landscape changes (due to government policy, external changes, world events, etc.) each location is going to experience the aftereffects in its own way.
Investors who are too exposed to any market will feel the effects of negative market changes and risk falling into a less-than-ideal financial position if the market contracts.
Property Management
Investors who manage their own properties can get caught in the trap of only buying local because it's easier to manage.
Although it is easier to manage your own properties if they're all local, this doesn't necessarily mean this is the best option.
The market rate for a property manager is circa 8% of your rental income.
Although this is a significant expense, this frees you up to make more educated investment decisions because you are more impartial with your property selection based on the fact you're not looking solely for properties that are proximate to you.
Ultimately, you're an investor, not a property manager so it's recommended to pay a professional to do that work for you.
Yield vs. Growth Investment
When considering your investment options, one of the things your advisor will discuss is investing for yield versus capital growth.
This concept is important because it outlines a strategy for investing in diversified types of properties in order to spread your investments across a range of typologies.
In simple terms, mixing up your investments between high-growth properties (e.g. standalone houses) and high-yield properties (e.g. dual-key apartments) is a good way to keep your portfolio balanced and allow future expansion.
The likelihood is that in your neighborhood, there will be a lack of different typologies to invest in which can result in investors putting too much of their resources into one typology which could negatively impact their ability to keep investing.
When the banks assess your financial position, they consider a certain percentage of your rental income for "debt servicing" meaning having a mix of higher-yielding properties will benefit your financial position when it comes to serviceability.
Having a holistic approach to your property selection is a key part of building a sustainable property portfolio.
Surrounding yourself with a team of people that can give you impartial advice on the best investment options that are appropriate for your own personal situation, should result in the best outcome for you.