updated 4th October 2016
I live in Melbourne, but I’m constantly reading about property hot spots in Queensland and other far flung places. I’m keen to invest, but I don’t have the time (or the money) to visit these sorts of locations myself, and I’m worried that buying sight-unseen might be too risky. What are your recommendations?
When the good people of Queensland read that you’ve called their home a ‘far flung’ place, they’ll visit you en masse and carry out a public lynching! Far flung it may be to you, but to several million people most of Queensland is ‘just around the corner’, and so a legitimate place to live and invest.
One of the biggest mistakes a property investor makes is to become emotional about purchasing property as an investment. The tendency to do so comes from a misguided belief that we somehow have a natural instinct for property – we’re born in it, and raised in it and so we all believe that we have an in-bred ability to choose it well. When we invest in shares and managed funds, we all know that an abundance of research must be undertaken and that we (as we part with our money) must take care to carry out our due diligence and become more educated about what we’re doing before we even begin.
Conversely, when we buy property, something strange happens to previously intelligent people and rather than be prudent about our purchase, we try to use our ‘gut’ instinct. We choose property near where we live (because we ‘know’ the area), we buy property we feel good about (because we love the colour of the kitchen) and we seek out property with ‘good tenants’ (because little old ladies make great tenants).
I believe the reluctance to invest away from our own areas comes down to three main things. Firstly, a belief that we ‘know’ the area in which we live better than any other area. The second reason is our need to be able to ‘keep an eye’ on our investment. Having it close by means that we can potentially drive past it on our way home from work to check up on the tenants! Lastly, we all seem to feel that our ‘eyes’ can in some way reassure us that an investment property will work out well, and so the need to ‘view before we buy’ precludes those areas too difficult to travel to.
I was speaking at an expo recently, when a woman approached me and said “I could never buy anywhere other than where I live, because I know my area well’. ‘Oh you do, do you?’ was my reply. ‘Please tell me about the vacancy rate in your area. What are the council’s future plans for development? What is the population growth? Tell me about the demographic makeup of your tenant base and the types of property they demand. And so on. Of course, she had no answer to these questions, although she could tell me what time the bus left her local stop to go to Westfield!
By the time I buy a property in this woman’s area, I’ll know her area far better than she ever will. More importantly, what I know about her area will be the information crucial to me being able to determine the potential of that area to grow and perform for me over the long term. I’ll ask the 20 questions I have developed which every property investor should know, which all determine investment viability. I’ll have suitable experts view the property to determine those things that I could never know myself, even if I did spend the money and visit.
Things like structural problems, termite activity, and general building condition. And while it may be a lovely place to live, my investigations may uncover the fact that it’s not the very best place for me to invest at that time. I can achieve all of this, without ever visiting the area – because the facts that I need to know can be derived from many sources, from the comfort of my own home. Taking a trip to ‘view’ a potential property will only satisfy my emotional needs – and so get me into trouble as I’ll then buy what I like physically, rather than what’s right for me financially!
As for the need to ‘keep an eye’ on your new investment, I cannot think of anything worse! I’m a property investor, not a property manager. Property management doesn’t pay well – around $11 a week, after tax. When you consider the work it entails – tenant selection, supervision, property inspections, tenant queries, collecting and remitting rent, then this payment is abysmally small. I have better things to do than watch over my tenants and get stressed about how they’re caring for my property. The chance to invest so far away that you’re prevented from doing this is one that you should embrace with open arms.
But more to the point, the financial blunder you’ll make when you consistently buy property in only one area (such as the area that you can easily get to in order to ‘look’ at what you’re buying’) is one which will impact on your ability to access asset growth on a consistent basis. Property behaves in cycles, but not the same cycle all over Australia. When one area plateaus, another booms, and vice versa. Buying in just one area means you’ll either have growth on everything you buy, or growth on none of it. All well and good when your area is booming, but when it plateaus, as it will, and probably for a long time, the absence of further growth will stall your investing and mean that you’re unable to add to your portfolio for a long time. Far better to have a little piece of many markets, than a big chunk of only one.