How to mitigate your risk when buying property.

Despite the fact that property has seen incredible growth in prices over many decades, there is still some risk that comes every time you purchase a property.

This is best understood, when you think about the averages. If property across the country has grown at around 7% per year for the last 30 years, then there are going to be some locations that have performed far better, while there are others that have performed worse.

As a property investor, one of the biggest risks you face is when you buy a property that does nothing. Think about the opportunity cost. You could be facing 10 years or more where your property value moves sideways or even worse, falls in value.

One of the best ways to mitigate this risk is by investing in locations that have a long-term track record of growth. That means you want to see locations that are at the upper end of that average.

If a suburb has seen property values increasing year in and year out for 30 years, then there is a very good chance that the next 30 years are going to be very similar. That’s because these types of locations typically have a real shortage of land and ever-increasing demand.

Again, I point to areas like the Eastern Suburbs in Sydney or the Northern Beaches. Each year more and more people want to move to these areas, and the supply of land is fixed. Even development in these areas is very small compared to the amount of people wanting to live there. That keeps upward pressure on prices, and it’s why these locations continue to perform.

On the flip side, if you’re going to be investing in areas without a track record of long term, then you are taking a risk and assuming that you know something special that others might not. A great example is the speculation in regional areas that have been flat for 10 years but might be seeing a short-term spike in demand. While they might grow in the short term, can you be confident that these areas will still be growing in a decade’s time?

It’s the same sort of thing with cities like Perth. Perth has not seen any capital growth for 10 years on a city-wide level, and now investors think that they can buy there because it is “cheap”.

If an area hasn’t performed or has a track record of boom and bust cycles, you are effectively guessing and hoping something is going to change.

Let the location do the work for you and capitalise on that proven track record. The wealthiest investors in the country aren’t going out and buying cheap homes in regional areas. They are focusing on blue-chip areas and high-quality properties as they know they will see strong growth over a long period of time.

Even with rising interest rates, there will always be demand for the best quality locations, and the buyers are also the ones who will be most immune from the higher borrowing costs.

So if you’re trying to avoid risk when buying an investment property, be sure to focus on quality and finding an area that has performed over a long period of time. When you couple that with buying the right type of asset in those locations at a fair price, you have a great formula for long-term success, and you can be sure you will be mitigating your risks.

If you are interested in the above, feel free to reach out to a Henderson buyers agent today for more information.

 

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