Q & O: Answering your Melbourne property investment questions

The property investment landscape is overflowing with opinions and commentary, some helpful, some a distraction and some downright misleading. At Rewarding Property Decisions, our mission is to cut through the noise and empower you with the knowledge you need to make truly rewarding property choices.

As we often say: Investing in property makes sense, investing in the right property takes knowledge. And that’s where we come in. We’re constantly researching the latest trends and issues to keep you informed. 

But we also know that everyone’s property journey is unique. That’s why we’ve been gathering your pressing property questions, to provide expert answers and insights to guide you on your property investment journey.

Choosing the Right Investment Property in Melbourne

Carol from North Adelaide asked: “My husband and I are considering buying our first investment property. I’m wondering what types of property in Melbourne make the best investments?”

Before diving into the property market, there are two main factors to consider when choosing an investment property: capital growth and rental yield.

• Capital growth refers to the increase in the property’s value over time.
• Rental yield is the return you get on your investment through rental income.

While some properties may offer a balance of both, typically they work at cross purposes, with high-yielding properties tending to be riskier, with more value in the improvements, while high-growth properties tend to have more value in the land component.

In Melbourne, we’ve found that the best investment properties often possess three key elements:

1. Strong underlying land value: Look for areas with high demand for land and limited supply.
2. Scarcity: Choose properties that are unique and not easily replicated.
3. Multifaceted demand: Properties that appeal to a variety of buyers (first-home buyers, upsizers, downsizers, investors) tend to hold their value better.

Based on these factors, single-fronted cottages and terraces within a 2-10km radius of Melbourne’s CBD often make excellent investments.There are a range of options in this category, including Victorian terrace houses, perhaps one of a pair of 1930s duplexes, as well as Edwardian cottages, both brick and weatherboard, depending upon the suburb. They typically have strong land value, are scarce due to their age and architectural style, and appeal to a wide range of buyers.

Understanding Scarcity Value

Megan asked: “I’ve heard you speak about scarcity value. What do you mean?”

Scarcity value is an important concept in property investment. It refers to the increase in value that occurs when demand for a property exceeds supply. In the property market, scarcity is created by two main factors:

1. Strong land value and location: Properties in desirable locations with limited land availability tend to be more scarce.
2. Architectural scarcity: Period-style properties that are no longer being built have limited supply, making them more scarce.

Investing in properties with scarcity value can lead to greater capital growth over time.

The Risks of Rental Guarantees

Gary from Inverloch asked: “I watched a YouTube Info Session. And the presenter spoke about buying property with a rental guarantee. How do these work?”

Rental guarantees are often offered by developers selling off-the-plan properties. They can be a red flag, as developers often use them to justify a premium price for the property. The rental guarantee typically lasts for a few years and promises a rental income that’s higher than the market rate. However, it’s important to be cautious.

When the rental guarantee period ends, investors may struggle to find tenants willing to pay the inflated rent, leading to potential vacancies and lower returns. It’s crucial to understand the risks associated with rental guarantees before investing in a property with one.

North-Facing Orientation: Is It Always Best?

Ruby asked: “My parents keep going on and on about making sure the property I buy has a north-facing orientation. Does this really matter?”

Your parents have a point, Ruby. North-facing properties in Melbourne generally receive more direct sunlight, which can be a desirable feature for many buyers. However, it’s not the be-all and end-all.

The best orientation for a property depends on various factors, including the type of property, its location, and the surrounding environment. For example, a south-facing apartment with stunning city views might be more desirable than a north-facing one without views. It’s essential to consider the specific features of each property and weigh the pros and cons of different orientations.

Renovations That Can Reduce Value

Xiao from Sydney asked: “What renovations could reduce the value of property?”

While some renovations can significantly increase a property’s value, others can do the opposite. Overcapitalising, or spending more on renovations than you’ll recoup in the sale price, is a common mistake.

Poorly planned renovations can backfire. For example, a two-bedroom apartment we once considered had its kitchen removed and replaced with a small bar setup in the living area, turning the original kitchen into a third bedroom. While the extra bedroom might increase renter returns, it created an unbalanced layout, sacrificing living space for an extra bedroom, which ultimately lowered the property’s overall appeal and value when it came time to sell.

Auction vs. Private Sale: Which is Right for You?

Barry from Ocean Grove asked: “Should I sell via auction or via private sale?”

The best method for selling your property depends on several factors, including the type of property, its location, and the current market conditions.

• Auctions are generally best when demand exceeds supply. They create competition among buyers, which can drive up the sale price. However, they can be risky if there’s not enough interest in the property.
• Private sales can be a good option when there’s less demand and you’re unlikely to get many people to the auction. This puts the buyer in a strong position, as they can see they don’t have much competition. In this case a private sale allows you a more controlled selling process.

It’s important to weigh the pros and cons of each method and choose the one that best suits your circumstances.

To Bid or Not to Bid: Auction Strategies

John from Mildura asked: “I’ve got a friend at work who told me not to bid on a property until it’s declared on the market. So what do you suggest?”

As with many aspects of property investment, there’s no one-size-fits-all answer.

While holding off can be effective in some situations, there are times when opening the bidding or coming in later can be advantageous. It depends on various factors, including the specific auction dynamics, the property in question, and your personal bidding style.

Observing other bidders, reading their body language, and understanding the overall mood of the auction can provide valuable insights to inform your bidding strategy. Sometimes, opening the bidding can encourage hesitant buyers to participate, while in other cases, holding back might allow you to gauge the competition and make a well-timed entrance. Ultimately, the key is to be adaptable and adjust your approach based on the specific circumstances of each auction.

The Pricey Puzzle of Villa Units

Anthony from Blackburn asked: “My partner and I are considering a villa unit as an investment. But I’ve noticed there are huge variations in price for properties that seem very similar. Why is this the case?”

Villa units can indeed make great investments, but their prices can vary significantly due to several factors:

• Location: As with any property, location plays a significant role in price. Villa units are often found on the middle ring suburbs, anywhere between 10km – 20km from the CBD. Some can be quite isolated in terms of connectivity. Villa units closer to amenities, transport, and popular areas generally command higher prices.
• Form of Title: The form of title (strata, stratum, or company share) can significantly impact a villa unit’s value. Strata title is the most desirable, followed by stratum and then company share. This preference is due to banks’ lending policies, as they may be less willing to lend against company share titles. This reduced borrowing capacity for potential buyers can limit demand and, in turn, the property’s value.
• Number of Units: Villa units in smaller complexes often have higher values due to lower body corporate fees and greater exclusivity.
• Courtyard Ownership: Whether the courtyard is on title or not can significantly affect the property’s value.

Investing in Other Cities vs. Melbourne

Michael from Dubbo asked: “I keep hearing how well markets in Brisbane, Perth and Adelaide are doing and should I be investing there? Or is Melbourne a better option?”

While Brisbane, Perth, and Adelaide have experienced strong growth recently, Melbourne still has significant potential for long-term growth.

• Brisbane: With major infrastructure projects and the upcoming Olympics, Brisbane is poised for continued growth.
• Perth: The Perth market is heavily influenced by the mining sector and can be more volatile.
• Adelaide: Adelaide has seen steady growth and may offer more consistent returns than Perth.
• Melbourne: But, Melbourne’s property market still holds significant potential in the medium to long term. This is due to its status as a global city with a thriving economy and cultural scene. However, several factors have contributed to a loss of confidence in the market recently. The pandemic, rising interest rates, increased land taxes, and stricter regulations favouring tenants have all played a role in creating a more stagnant market in the short term. Despite these challenges, as Richard Wakelin has always said, the longer a market is held back, the harder it kicks when it goes. For example, Melbourne experienced a similar period of plateauing in the early 1990s, followed by significant growth in the late 90s. This potential for a strong rebound makes Melbourne a promising long-term investment opportunity. While short-term growth may be limited, we believe that Melbourne’s property market will experience substantial growth in the future. It’s a matter of being patient and understanding the cyclical nature of property markets.

At the end of the day, the best city for you to invest in depends on your individual goals and risk tolerance. It’s important to research each market carefully and consider the factors that are most important to you.

Finally, as always, we encourage our readers and listeners to share their experiences and insights. If you have further questions or need detailed guidance, don’t hesitate to reach out or visit our website for more resources on making rewarding property decisions.

Here’s to making informed and successful property investments.