When purchasing an investment property all investors at some point contemplate the price point they should purchase at. In many cases, the investor will visit their bank or speak to a broker to determine their maximum borrowing capacity. Many investors then purchase the most expensive asset they can, assuming more expensive leads to greater capital growth. Purchasing a more expensive property does allow an investor to hold more property as their money is leveraged further. However, more expensive doesn’t translate to a better-performing asset. Moreover, a question many novice investors don’t usually ask until further down the track is how does this property serve me and my own goals within investing? This question should really be at the forefront of any investment decision and will ultimately influence the price point for purchasing an investment property.
A common misconception
A common misconception across many property investors is that cheaper properties lead to “poorer performance”. While more expensive is considered “better quality”. This is far from the truth when solely looking at numerical data over the short and long term. The term cheaper generally refers to properties below the national average house price. These properties have shown to achieve the same and in many cases more capital growth relative to their purchase price. In addition, they generally have higher yields making them easier to hold. They also allow investors to diversify capital across numerous markets. A property’s price point does not determine its performance, the demand for a property is the driving force behind property growth. If you want to purchase a better performing asset look at the supply vs demand of a property.
Identifying the perfect price point for an investor is impossible without understanding the investor’s circumstances. An investor’s circumstances will dictate their financial limits. It will also highlight how much additional funds they are able to contribute to holding property or a portfolio of properties. If the investor has high cash flow they may purchase a high-end property or build up a portfolio of relatively expensive properties. If an investor has poor cash flow they may look at purchasing at a cheaper price point for increased yields and lower holding costs. A smart investor will understand the importance of both capital growth and cash flow and cater to this. Therefore, the investor’s circumstances dictate their approach and the parameters they may be required to work within.
An investor’s goals will impact the price point of purchase. When investing in property an investor is looking to create cash flow, build their net worth (wealth), or a blend of both. If the investor can create an objective goal they can then reverse engineer a plan which works towards their goal. There may be multiple ways to work towards the outlined goal but the strategy which is derived from the goal will dictate the approach an investor takes and ultimately the price bracket they search within. If wanting to focus on cash flow then high-yielding properties will be targeted which are inherently cheaper. If looking to optimise capital growth an investor may have to consider more expensive properties to ensure they can purchase in the highest demand suburbs.
Property type and location
The type of property will impact the price point at which an investor purchases the property at. Different types of properties have varying levels of cost for purchase. For example, a house could cost multiple millions. However, an apartment or duplex in the same location will likely have a cheaper buy-in price. If an investor wants to purchase a particular type of property then this will be reflected in the purchase price. The property type influences the purchase price and likewise the type of property an investor chooses to buy based upon its price points.
Furthermore, the location of a property will play the same role. If an investor is looking to purchase in a metropolitan market, they may require a million dollars to purchase. However, smaller cities or regional towns could demand a quarter of this price point due to their locality. The location of a property will also influence the price point required to purchase within a certain area.
There are numerous variables that influence the price points of a property. As an investor rather than asking what price point should I purchase at? A far more important question is what are my limits, what do I want to achieve and what approach will I employ? By answering these questions, inherently the price point which suits the investor will be revealed and the approach behind investing is greater clarified. Let your goals create your plan and your plan determines your next step forward.