How to find locations with strong yields and solid capital growth



Paul Bieg

Choosing the right location is paramount for success, but which areas will offer the perfect combination of high rental returns and sustainable growth in value? 

Blogger: Paul Bieg, director, BIG Property Investments

Paul Bieg

Choosing the right location is paramount for success, but which areas will offer the perfect combination of high rental returns and sustainable growth in value? 

Location, location, location – we’ve all heard the cliche, but we hear much less about what is meant by this ubiquitous word.

The truth is, location means different things to different people. To the elderly it might mean a quiet alcove in a quiet suburb and to those dependent on public transport it might be a busy street with easy access to buses and trams. Young people, on the other hand, might regard a bustling inner-city location as the perfect address and parents will usually check out the local schools before settling on a suburb.

Different people have different needs, so if a location can cater to an individual’s particular set of circumstances, then it may well be perfect for that person.

I’m more interested in defining what makes a perfect location for a property investor, but before I answer that, another question needs to be asked: why are you buying an investment property?

In my experience, it always boils down to one major reason – to make money. If that’s not true for you, then you’re reading the wrong blog.

If we can agree that the purpose of buying an investment property is to build your wealth portfolio, the obvious next question is how is this investment property going to grow your wealth?

There are only two ways an investment property will enrich you. The first is through the income it will generate via rent. The second is through capital growth. Rental income only happens if the property is positively geared – that is, if the rent being generated exceeds the mortgage repayments. If it doesn’t, then the property is negatively geared, which removes one of the pillars of my wealth-generation strategy.

Quite simply, I don’t believe in negatively geared investment properties and if that’s the only way to add a particular property to your portfolio, then I’d be inclined to say that property is not in the “right location” for you.

The only exception, of course, is if the property is in an area with proven capital growth. Investors can make money from a property primed for capital growth when they sell. Their profit is represented by the difference between how much they paid for the property and how much they sold it for.

A conventional rule of property investment dictates you make money either through the agency of cash flow-positive properties or via capital growth, but not both.

And that is where my definition of location for property investors comes in. The properties I invest in, and in which my clients invest, defy conventional wisdom by being both cash flow-positive and generating substantial capital growth.

Here’s the secret: an investment property needs to be located where there is plentiful high-end demand for rental properties. The high demand pushes up rents – and the higher the rental return, the greater the value of the home. The higher the value of the home, the less likely renters are to commit to buying one and thus continue paying the high rents.

It is a perfect storm for property investors, but it is also a delicate balancing act because very quickly high-end demand can evaporate and all you’re left with is a mirage of investment properties.

If I may coin a new cliche: research, research, research will determine location, location, location. Remember, it’s not only who you know but also what you know, so get “knowing”!

Paul Bieg

Paul Bieg

BIG Property Investments is the creation of Paul Bieg and was born from a love of every facet of property investment. Paul believes the only path to unlimited wealth through property investments lies in identifying cashflow positive properties. He has learned that so long as a property is cashflow positive, it melts the resistance of the banks to become investment partners. Subsequently, he has developed a formula that delivers cashflow positive properties and is always keen to share those insights with his investment partners. "I like to develop a symbiotic relationship with my fellow investors," explains Paul, "where the issue of trust doesn't arise and is not asked for because there is always complete disclosure."

 

How to find locations with strong yields and solid capital growth
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