Yahoo Finance Why property investors should become 'borderless'
Should you become a borderless investor – that is, invest in another state?
The short answer? Yes, absolutely.
The long answer? There’s so much you need to consider when investing in property, and the location and your proximity to the property is just one of them.
I have always been a huge proponent of borderless investing – which is to say investing in property that is located intra-state, inter-state or basically anywhere in Australia where the fundamentals stack up.
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Investing interstate is not without its risks
But to be a successful property investor who creates sustainable, lasting wealth from your property portfolio, it’s my belief that you need to adopt a diversification strategy.
This is because (and I may sound like a broken record here to people who have read my articles or seen me speak on this topic before), there is not one “single” property market in Australia.
Our country is made up of many real estate markets, which don’t always move in sync – they each have their own cycle.
Just look at the significant variance of the different property markets in 2020 for evidence of that.
Values have been falling in one market and rising in another, a dynamic that sometimes plays out at a suburb level.
By that I mean, one suburb can be experiencing growth, while a nearby suburb may not.
There are so many reasons for this, including the individual characteristics of the neighbourhood.
An oversupply of apartments, for instance, can make one suburb perform poorly, while a few suburbs over, closer to the city and with less apartments, the market is growing.
The big benefits of becoming a borderless investor
Investing in a city other than your own can be a wise way to spread your risk across multiple markets, and take advantage of growth cycles that may be stronger than your local area.
Over the years, I’ve come across a large number of investors who strictly buy in their own state (or worse still, their own city) because it’s in their comfort zone.
It just makes sense to them and they can easily visit the property and keep an eye on it with their own two eyes.
They make this huge investment decision based on their proximity to the property, rather than on evidence, facts or research.
This is a decision that is often made to their detriment in the long run.
Think about it: if you limit your investment options to your own backyard, are you really setting yourself up for financial success?
Furthermore, searching for properties in your local area is not really ‘researching’.
Rather, it’s searching for facts to support your ready-made preconceived opinion that the area is a good place to live or invest.
After all, you have a vested interest in this outcome – you already own your own home in the area and it’s your hope that it will grow in value.
This is known as confirmation bias and it’s a common problem for property investors.
Some investors tell me they like to buy in their own area because if it’s a suburb they enjoy living in, they assume others will.
This may very well be the case.
But is that really the best criteria on which to base your investment decisions? “I like living here, so surely a tenant will!”
What about public transport? If you have a car and your tenant relies on PT, they might not find the area as convenient as you do.
What about drivers of growth? What are supply and demand ratios like? Are there a broad range of people who want to live in the area – families, students, professionals, migrants – or is it a select group who like the suburb?
And what about vacancy rates? Your area might be a desirable place to live, but if there are plenty of properties on the rental market already, you might be waiting too long in between tenancies.
These are just some of the questions I encourage people to ask themselves when deciding where to invest.
The truth about property investing
Diversification of location is key.
This is very different to having a philosophy of diversification of investments, which is a whole other ballgame (on which I have very strong opinions!)
It’s those investors who have diversified property portfolios who will find they benefit, as different capital cities each have their own day in the sun – as their cycles peak at different times.
There are also land tax issues to take into consideration. If you acquire a number of property assets within one state, you could end up paying a whopping land tax bill every year.
By spreading your risk and buying properties in various locations, you may minimise the amount of land tax you’re required to pay. This is not a reason to diversify, it’s just one of the possible benefits.
Now don’t get me wrong… I’m not suggesting investing in other states just for the sake of it. What I’m recommending is that as investors build their property portfolios, they should add investment grade properties in the three big capital cities in Australia to their assets.
Nor am I advocating trying to time the market, as time in the market is more important, it’s nice to ride the wave of a property cycle as it rises.
If you’re keen to become a borderless investor but you’re not quite sure what to do next, get a local expert to help you. But be careful not to work with a buyers agent who flies in and out; they just don’t have the perspective you get from being on the ground for years.
Then, you can start enjoying the benefits of this diversified strategy, where you are exposed to different markets and you are more likely to have one or two properties growing in value strongly allowing you to approach the banks for more finance.
More finance means more property investments – which leads to financial freedom.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog and hosts the popular Michael Yardney Podcast.
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