I talk a lot about asset selection. Probably because it’s important. And it’s important for more than one reason.
In the first instance, if you fail to identify a property that can prove its worth in your portfolio, it’s unlikely you’ll obtain the necessary mortgage to acquire it, or manage to comfortably service it for the years to come.
You’ll also lose out on critical equity required to grow a viable real estate nest egg…one that attracts consistently sufficient long-term capital growth to ensure a decent income when you finally retire.
A poor quality rental property can be a constricting financial noose that inevitably causes the demise of your entire future fund. That’s why I bang on about getting your asset selection right in the first instance, or correcting a bad-buying decision as soon as it’s identified.
Understanding some of the key fundamentals that drive market values will go a long way to directing how you research and ultimately select an investment grade property asset.
Importantly, you always need to keep in mind the four golden rules…
- Does it answer your needs?
Optimal asset selection always comes back to your own personal investment goals and strategy. There really is no ‘one size fits all’, because we each have unique dreams, circumstances and requirements.
If cashflow and income are your priority, then you’ll need to account for this when researching your ideal investment location. Likewise, if you’re more intent on finding a property from which to build a strong store of equity, this is something you have to look for.
- Does it answer your buyer’s needs?
Logically the only person you want to please more than yourself is your buyer…or the market in general really, as it’s market demand that ultimately determines long-term price growth.
This is about finding a location that demonstrates sustained levels of high demand across historical price growth patterns, usually due to excellent amenity and infrastructure, as well as a diverse industry and employment base.
Speak to local agents about turnaround times for new listings to get a feel for how much activity occurs across different markets you might be considering. Look at auction clearance rates, days on market and value movements over time.
- Does it answer your tenant’s needs?
Without tenants you have no income. Without an income, you have no way of servicing the mortgage on your investment property, aside from out of your own pocket, which can get a little tricky to manage for the majority of folk.
You should ideally get to know the type of tenant you’re dealing with before you purchase a rental asset. Because you need to understand what it is the local market wants from a home.
Meet the tenant’s needs and you’re well on your way to ensuring a consistent cashflow with which to sustain your property portfolio. It’s all about ensuring ongoing demand from a reliable tenant base.
- Does it have enduring appeal?
None of the above matters if the appeal of an asset is fleeting. Consider the many property investors who were burnt by the mining boom. When commodities fell out of favour and the resources sector started to stumble, towns literally built on the back of this industry started disappearing. Or at least the populations required to sustain the local economies did.
I cannot tell you the amount of horror stories we’ve heard from boomers on the brink of retirement who lost everything due to highly speculative asset acquisitions.
Tried and tested might be boring, but it’s also best for the investor’s bottom line…and ultimately that’s what matters most when it comes to optimal asset selection.