Why 67% of Australian property investors may be buying in the wrong location

A message from our CEO & Founder, Joseph Chou

According to a recent research paper in the academic publication Pacific basin Financial Journal, more than two-thirds of Australian property investors have purchased an investment property that is very close to their home.

This ‘home bias’ effectively means that if an investor lives in Chatswood, they’re far more likely to buy an investment property in Chatswood over any other location in Sydney or Australia.

Having a home bias is understandable. It feels safer to buy in a location you know well, and to be able to see, touch and feel a property first-hand. For most people, their first experience of property is buying their own home, so they approach investing with the same mindset.

But one of the ‘golden rules’ I first learned, when I was starting out as an investor, is in fact, to try to avoid investing in the same suburb as your home – and perhaps even look to invest in other cities.

In 1998, when I was first starting out as a property investor, I was recommended to buy two apartments in Perth – both 2-bedrooms, nearly new, less than 10km from the city at a price of $60,000 each. At the time I was a novice investor and there wasn’t so much information available on the internet as there is today. Fear held me back and I ended up passing on the opportunity. In 2006, just eight years later, the apartment prices soared to about $400 – $500,000. If I’d bought the two apartments, I could have had 6-7 times the capital growth.

Why should you diversify beyond your home suburb?

There are two main reasons to diversify in terms of the areas in which you invest. Every suburb grows at a different pace – no suburb will continue to grow steadily forever, each market works in cycles. If your home and investment properties are all in the one location, you will miss the opportunity to take advantage of other market cycles.

Even in a wider market downturn, there are still some suburbs that might outperform the city or national markets. For example, in the past 12 months, house prices across Australia have fallen by 5.2%. But apartments in Toorak, Melbourne and houses in Surfers Paradise, Gold Coast have risen by over 19% in the same period.

Secondly, the reason why people choose to buy their home in a certain location is based on their personal lifestyle needs or affordability range. But the reasons why you like an area doesn’t mean it will appeal to everyone. And even if your home suburb is a great suburb to live –  how likely is it that the suburb you live in will always be the best performing suburb Australia-wide?

When you buy a home it’s an emotional decision. But when buying an investment property, it has to be a practical decision. “Buy a home with your heart and invest with your brain.”

With diversity comes choice

The other benefits of portfolio diversification is choice. For example, if you live in Sydney and are considering investing in Sydney, then you’re likely to face two options:

  1. You can’t afford to buy an investment property in your home suburb
  2. Within your budget you can only buy within 30 – 40km of the Sydney CBD

By expanding your options beyond your home city, you can tap into other more affordable markets, in cities such as Melbourne and Brisbane, where you can still buy a great property very close to the CBD or in a premium location at an affordable price.

After the 2003 Sydney market peak, we saw opportunities in Brisbane and the Gold Coast – where high growth was predicted by analysts. At that time, we took our investors there, which helped them to experience some growth at a time when many Sydney investors were losing confidence in the market – seeing zero growth for their Sydney properties in the years between 2003 – 2013.

Taking advantage of other markets can not only add value to your portfolio, it can also build your equity which you can take out to invest in another emerging market.

It’s hard on your own

While all this makes sense on paper – one of the major challenges investors face in being able to follow through and invest outside of their home suburb or home city is that it’s simply too hard to do it on your own. It takes time and money to fly around, co-ordinate inspections, agents, do additional research to learn about the local market and find the right investment property. And afterwards – there’s managing the property to consider.

At Ironfish we have seen many investors come to us with their own personal beliefs of what, where and when to buy. But once they see it from a wholistic point of view, it very quickly makes sense to diversify – especially when you have the opportunity to pick outstanding properties from some of the best developers in the country.

I remember one of our Sydney customers, who already owned three investment properties in Sydney, came to us and over a five-year period, was able to acquire an additional eight properties to his portfolio, covering all the major capital cities and various property types. On his own, it simply couldn’t have happened so quickly and easily.

The Pacific Basin research study found that ‘sophisticated investors’ were more likely to invest outside of their home suburb – i.e. investors who already receive rental income, own shares or work in corporate or management positions.

But our aim is to remove the obstacles that prevent more Australians from investing in unfamiliar markets. By building a long-term relationship with our customers, by providing personalised strategies and quality property recommendations backed by the confidence of the latest research – our aim is to help more people invest with confidence across all the major cities of Australia to achieve their long-term property goals.

Joseph Chou is the CEO and Founder of Ironfish. He presents regularly at seminars and workshops around Australia. 

 

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