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What not to buy

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By Rich Harvey, Managing Director, www.propertybuyer.com.au

We are asked everyday of the week "What is a good property investment and where should I buy?"  To shed some light on this question, let's have a look at some of the fundamental mistakes that investors sometimes make and ten things you should avoid.
1.  Areas with poor rental demand.

There are some suburbs with an over-abundance of investment properties and a distinct lack of owner occupiers.  We like to buy for our investor clients in suburbs that generally have around 70% owner-occupied stock for a few reasons.  Home owners typically take more pride in the appearance of their homes which makes the streetscape more attractive.  Home owners are less likely to sell during a market downturn, thereby putting more of a floor under prices for an area.  And thirdly, there is more demand for rental property due to constricted supply, which means rents are higher.
2.  Generic, standardised units in massive high rises, in outer areas. 

Don't buy a clone property.  Look for properties that have some uniqueness value.  This is critical to achieving the right balance of capital growth and solid rental yield.  While there are some excellent high rise apartment blocks close to the CBD, be wary of developers or marketers selling you the "dream" apartment in areas that are just too far from the city or there are simply too many of the same type of apartment in the block.  Some large blocks being promoted in Parramatta, Liverpool and Blacktown are very boxy, have boring architecture and are primarily sold at a higher price to unsuspecting investors.
3.  The bargain property: 

Be wary of waiting to buy until you find that bargain property.  If the property is being marketed as a "bargain" there needs to be a compelling reason.  Perhaps it is located on the corner of a busy intersection, or the petrol station next door has leaked contaminating chemicals, or the neighbours were recently busted for drugs.  On the other hand, if the vendor is selling under duress because of financial problems or divorce then it could be a genuine bargain.  You need to ask the right questions and research thoroughly to get the answers.
4.  Buying at twice the median price. 

Consider your exit strategy when you buy.  Who will buy the property after you?  If the median price is say $800k, then how many people are prepared to buy at $1.6m?  Probably only around 5% of the market, whereas over 90% of the market are targeting the median price segment.  However, there is an exception to this rule - some properties are so unique that they command a price three or four times the median price!
5. Industrial zones. 

Buying next to a panel beater, metal works or an abattoir is not attractive to tenants. While the properties are usually cheaper, this is for a very good reason!  While you can get a house or unit on main roads cheaper, they will always be discounted in the future.  This will constrain your capital growth and rental returns.   It's generally noisier and harder to get out of your driveway every day.
7.  Stigmatised houses. 

Houses where there has been a suicide, murder or other dramatic event get the unfortunate title of being "stigmatised".  Hedonic pricing analysis has shown that this can reduce the value of the property by 20% to 30% in some cases.  Under revised legislation, selling agents are obliged to reveal all "material facts" about a property.  While you may net a bargain, it may be hard to off-load to the next buyer.  Same thing applies to high crime areas.
8.  Power lines, mobile phone towers and stanchions. 

While health studies on the effects of electro-magnetic radiation from power lines and phone towers shows inconclusive evidence, there is still a very strong perception that these things are bad.  And it is perception that drives price at the end of the day!
9.  Miles from everything. 

Being close to shops, transport and good schools is highly sought after by home buyers and tenants. Don't be fooled by cheaper prices to buy in the new subdivision 60km from the CBD but in an area that lacks basic infrastructure and soul. 
10.  Schizophrenic floorplans. 

Properties that have poor aspect, squashy bedrooms, strange features, lack an outdoor living area and a generally dysfunctional floorplan are best avoided.  Renovating to fix the problems with the layout will quickly surpass the discount you may have got when buying the property.

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