The difference between an investment property and a home

While buying a home is driven by personal preferences, emotions and lifestyle factors, purchasing an investment property should be an objective and calculated business decision.

Unfortunately, given the aspirational and status oriented nature of Australia’s property market, emotive considerations often bleed into property investment decisions.

As a result, short term emotional gratification comes at the expense of long term capital gains.

Why the confusion?

Residential property, like no other business transaction, cuts through our social, financial and lifestyle circumstances.

We see property as a reflection of ourselves, and in turn how we’d like others to see us.

While it’s natural for these factors to drive our mindset when buying a family home, emotional and financial value must be skewered apart when investing.

Love is often blind and can often overshadow the market and financial imperatives that drive successful property investments.

It’s not hard to see how the thinking surrounding property investment and home ownership have become confused.

Australians have an enduring attachment to homeownership, which has become a strong narrative within our national consciousness.  However, that hasn’t always been the case.  Pre-World War Two, it wasn’t uncommon for Australian families to rent the same family home for the majority of their lives.

After the war the government began to encourage homeownership as part of economic growth strategies.  The three bedroom, brick veneer dwelling on a quarter acre block became the Australian dream.  As these properties began to appreciate in value over the following years, it became clear they weren’t merely family dwellings, but a chief source of wealth for most Australians.

People’s most cherished personal possession and most financially valuable asset, effectively became one and the same thing.  This has often resulted in homeowners confusing spending and investment decisions in relation to their home. While renovations can certainly satisfy personal preferences, they often result in over capitalisation, if not judged against market expectations.

Even amid today’s globalised economy and the diverse investment opportunities now available, the mindset that a home is the chief source of wealth still holds true for many Australians.

Little wonder then that we tend to confuse the attributes of a good home and investment property.

Investment grade property

The main game in property investing is securing long term capital growth, and to a lesser extent strong rental yields.

So let’s look at the hallmarks of what makes a true investment grade property.

The scarcity value of a property is informed by supply versus demand.  Period homes in blue ribbon suburbs typically have a high scarcity value, while apartments in high rise developments usually sit at the other end of the spectrum. However, a scarce property is not an anomalous property.

Scarce properties are often quite conventional for their period, but are wanted by more buyers than there are properties available. Scarce properties have recognisable styles and conventional floor plans, but are not being built anymore.

Underlying land value is also a major driver of long term capital growth.  Again the law of supply and demand underpin this dynamic.

Property in inner city suburbs – where land is finite – appreciates faster than outer suburban and regional areas, where land is more plentiful.  A property with multifaceted demand is attractive to multiple buyer profiles, which drives up demand and sales prices. This is particularly important during market slumps when certain buyer profile types may choose, or be forced to dip out.

A property with strong multifaceted demand has the potential to generate interest with first time buyers, upgraders seeking to move into a unit or house; downsizers looking to scale down, as well as investors seeking a low maintenance property with strong rental demand.

In more recent times, there’s also been a growing segment of demand from sea and tree changers, seeking a bolthole in Melbourne.

Rental yield is often a crucial factor in the viability and long term sustainability of an investment property.  A competitive and reliable rental income offsets holding costs, such as loan management fees, council rates and insurance, as well as replacing income streams in retirement.

However it’s important to keep rental yield in perspective. While certainly an important factor, long term capital growth should be the major consideration guiding property investment decisions – as that’s where maximum wealth creation lies.

Proximity plays a significant role in a property’s appeal.  Distance from the CBD and its amenities, lifestyle offerings and commute time help dictate buyer demand.  While there’s been a trend away from cities in the wake of the pandemic, at some point in time, habits will return to a degree of normality, and the pull of the city will re-intensify.

Proximity to natural public open spaces is also a factor. Especially over the last 18 months with restrictions regarding movement.

The architectural conformity of property can also play a role in buyer demand, and therefore long term capital growth.  This is particularly the case with period style homes, which are increasingly being viewed like antiques, as they age and enthusiasm for Melbourne’s architectural history grows.

Whether Victorian, Edwardian, Art Deco and in more recent times Mid-Century; quality period homes in popular suburbs are becoming increasingly scarce within the market.  It’s a factor that’s become more pronounced, with the demolition of some period homes and the drastic renovation of others.

A logical floor plan and structural soundness help underpin the long term capital growth of an investment property.  A solid floor plan sets up the functionality, balance and aesthetics of a dwelling.

The particulars of a floor plan will vary depending on the type of property being purchased, and need to be judged in line with differing buyer types and market expectations.

The structural integrity of a dwelling is a vital factor in the financial viability of the investment.  Spending thousands on repairs and maintenance won’t increase the value of the property.   A structurally sound building enables owners to instead spend time and money on cosmetic and livability upgrades that will bolster the property’s resale and rental value.

Take home message

Residential property investment is a business venture and requires a rational and objective state of mind.  The emotional pull of property must be disentangled from the investment decision making process.

The factors we’ve discussed above should underpin your mindset, to ensure you realise long term capital growth and rental goals.

It’s estimated that at any one time, less than one in 20 properties on the market is a true investment performer.  Objective research, market knowledge and astute negotiations – unclouded by personal sentiment – are key to unlocking this market potential.

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