{"id":2179,"date":"2022-03-23T09:16:39","date_gmt":"2022-03-23T09:16:39","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/most-important-property-investing-golden-rule\/"},"modified":"2022-03-23T09:16:39","modified_gmt":"2022-03-23T09:16:39","slug":"most-important-property-investing-golden-rule","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/most-important-property-investing-golden-rule\/","title":{"rendered":"Most important property investing golden rule"},"content":{"rendered":"

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Please use the menu below to navigate to any article section:<\/p>\n<\/div>\n

There is one property investing\u00a0golden rule<\/em>\u00a0that is more important than everything else. <\/strong><\/p>\n

\"GoldenAnd if you nail this \u2018one thing\u2019, you are guaranteed to build wealth over the long run.<\/p>\n

This statement might sound sensationalist, but I honestly cannot overstate this point.<\/p>\n

The golden rule is that the\u00a0quality<\/em>\u00a0of the property you invest in will determine your long-term investment returns.<\/strong><\/p>\n

If you invest in an average-quality property, your long-term returns are likely to be average.<\/p>\n

Of course, if you want above-average returns, you must invest in an above-average quality property.<\/p>\n

This golden rule applies to all other assets classes as well, including shares, bonds, commercial property, and so on.<\/p>\n

What does\u00a0\u2018quality\u2019<\/em>\u00a0mean?<\/span><\/h2>\n

\"Quality\"A\u00a0quality<\/em> property has the necessary attributes that sustain a level of buyer demand that perpetually exceeds supply.<\/strong><\/p>\n

This imbalance of supply-demand results in appreciating value\/prices in the long run.<\/p>\n

A high-quality property is often referred to as\u00a0investment-grade<\/a>.<\/p>\n

It is worth discussing the factors that impact supply and demand.<\/p>\n

In investment-grade locations, supply is fixed or diminishing<\/span><\/h2>\n

Supply is probably the easier of the two factors to understand and ascertain.<\/p>\n

Supply refers to both land supply and dwelling type\/style.<\/p>\n

Regarding land, it is important that the supply of land is fixed and finite.<\/p>\n

Consider a well-established, blue-chip suburb.<\/p>\n

In these locations, there is rarely any vacant land available, often within a 10km to 20km radius.<\/p>\n

And there is no way that any new land can be \u2018released\u2019 for sale.<\/p>\n

However, in outer suburbs, land supply can be abundant due to land releases within a 20km radius.<\/p>\n

The further a property\u2019s location is away from available vacant land, the tighter supply will be.<\/p>\n

Property type and style also affect supply.<\/p>\n

For example, in high-land value locations, the supply of houses rarely changes, because it\u2019s rarely economical to complete small sub-divisions in high-land-value locations, so the number of houses\/townhouses remains unchanged.<\/p>\n

However, the supply of apartments can more readily change e.g. when a developer buys a commercial site and builds a residential tower.<\/p>\n

An example of a property type on the opposite end of the scale is Victorian houses.<\/p>\n

Virtually no one is building Victorian houses anymore, so their supply is finite.<\/p>\n

In fact, some probably get demolished every year, so supply is probably diminishing.<\/p>\n

Buyer-demand perpetually exceeds supply<\/span><\/h2>\n

\"BuyerBuyer demand refers to the size of the pool of potential buyers that desire to own property in a particular location and can afford to do so.<\/p>\n

Demand substantially exceeds supply\u00a0<\/strong><\/p>\n

When the number of buyers exceeds the number of sellers, property prices tend to rise.<\/p>\n

Of course, that\u2019s because buyers must be willing to pay more to successfully purchase a property.<\/p>\n

It is important that you invest in locations when buyer demand substantially exceeds supply.<\/p>\n

Notionally, there might be 10 buyers for every one seller.<\/p>\n

This level of imbalance in supply and demand will ensure that property prices will withstand changes in supply (e.g. an unusual number of properties for sale) or demand (e.g. an economic recession causes buyer demand to reduce).<\/p>\n

Despite what happens, it is likely that the number of buyers will always exceed the number of sellers and prices will be supported.<\/p>\n

Demand is diversified<\/strong><\/p>\n

\"Buyers\"When considering a property investment, it is wise to consider who might like to own said property.<\/p>\n

It is important that the property appeals to a variety of types of buyers.<\/p>\n

Again, notionally, if you have 10 potential buyers (as mentioned above), 3 of them might be self-funded retirees, 3 investors, 3 owner-occupier upgraders, and so forth.<\/p>\n

Ensuring that your property attracts a diversified pool of buyers will ensure it benefits from a sustainable and robust level of demand.<\/p>\n

Property that attracts buyers willing and able to pay more<\/strong><\/p>\n

Can property prices continue to rise forever?<\/p>\n

When considering this question, the media often compares average household incomes to average property prices and draws the conclusion that housing is becoming more unaffordable.<\/p>\n

\"DrawingOf course, this is a meaningful microeconomic analysis.<\/p>\n

However, it\u2019s less important for property investors.<\/p>\n

You must invest in a location that attracts higher-income earners and wealthy people.<\/p>\n

The wealthiest 20% of Australians have almost\u00a03.5 times more wealth<\/a>\u00a0than the average Australian.<\/p>\n

That is why it\u2019s meaningless for investors to compare average incomes to average property prices and draw conclusions unless you plan to invest in an \u201caverage\u201d property.<\/p>\n

Instead, if you invest in locations that attract the wealthiest 20%, then it\u2019s more likely that buyers will be able to continue to afford to drive property prices higher over time.<\/p>\n

\"Golden<\/p>\n

Factors that drive demand<\/span><\/h2>\n

Different locations are driven by different factors and rarely are two locations the same, so it\u2019s important to understand the nuances of each market\/location.<\/p>\n

That said, I\u2019ve listed below some of the common factors that drive demand in investment-grade locations.<\/p>\n