What factors make for long-term property investment success?

If only we had bought more property 20 years ago! With the benefit of hindsight, we all look at historical property prices and wish we had bought more back in the day. It’s all too painful to look at a multi-million dollar property only to find out that it was once only a small fraction of the current price.

This problem has plagued us for generations. Time and time again, we look back on the property prices of our youth and wish we had scooped up more when we had the chance.

Whether you’re looking to invest or buy a home to live in, there are a number of important factors to take into account when making any property purchase.

Outlined below are seven important factors for you to consider when evaluating the viability of your next long-term property investment.

Foresight

If only we had a crystal ball. According to the Australian Bureau of Statistics, in 2000 the median house price in Sydney and Melbourne were $287,000 and $191,000 respectively. This is a far cry from the house prices of today.

Back in 2000, if you had told everyone that Sydney’s median house price would be above a million dollars there would have been many sceptics. Lots of people would have argued that nobody could ever afford that much! However, here we are.

Long-term investing requires the foresight to imagine what the world will look like (and how much property might cost) in the future. This is actually very difficult as it is hard to perfectly imagine the future. It is also a very challenging task to imagine properties potentially costing many multiples of their current value. To make the best purchase decisions possible, use different data tools and expert opinions to research predicted property prices in areas you’re considering buying into.

Supply & demand

Australia’s population is approximately 25 million and growing faster than ever before. When making long-term investment decisions you need to consider how this continued population growth can work to your benefit. Essentially, you want to invest in assets that have a limited supply with an ever-growing demand.

As the populations of our major cities continue to grow through migration, consider how you think these pressures will impact house prices. Can ongoing migration be absorbed by the current supply? Is there enough land and amenities near our major cities for continued expansion? Or is there a finite supply of suitable land for housing?

In your investment approach, if you have the budget for it, focus on properties with a decent amount of land – they’re not making any more of it.

Location, location, location

Following on from supply and demand, location feeds into the same reasoning. For long-term property investment location is an extremely important consideration. You want to make sure that there are lots of factors that’ll continuously drive the rental demand and capital growth of your property. Such as proximity to public transport, education facilities, shopping, parks and upcoming infrastructure projects.

We focus on investing near major cities because there are multiple drivers of both market resilience and growth. By investing in a property that can service workers from multiple industries it means you’re not going to suddenly be caught out by a sudden market change. An example for us would be to avoid locations that are reliant upon a single industry (such as mining or car manufacturing).

Location is a fixed factor, unlike the actual dwelling which can be updated or replaced, you’re stuck with a location choice until you sell. So, choose wisely.

Buy & hold

Don’t wait to buy property, buy property and wait. One of the good old property investment sayings!

Buy and hold is one of the simplest real estate investment strategies, but it does require significant patience.

While past performance is not a reliable indicator of future performance, history shows us that it has been one of the most successful property investment strategies. This strategy is to simply buy a property and have a tenant help you pay off your loans through rental income. You can potentially draw down on the equity to buy more property. The real question you need to ask yourself is – how long can you wait?

Test of time

Will your investment stand the test of time?

The construction quality of your investment becomes very important when making long-term investment decisions. If you invest in a property with poor construction you might run into lots of additional costs down the track for repairs and maintenance.

To help protect against buying or investing in a property with poor construction, a thorough building inspection by a qualified expert is a must do. A qualified professional will help to identify any signs of poor quality construction or damage that might become an issue. Always make sure you’re working with a fully licensed building and pest inspector to go through the property with a fine-tooth comb to cover yourself from buying someone else’s problems.

Diversification

A great challenge with any property investment strategy is diversification, having a property portfolio with assets in multiple locations. When investing for the long-term you want to be in the best performing markets. However, there will always be individual market cycles that’ll impact the performance of your different properties.

By holding a diversified portfolio, you can reduce the risk that comes with only investing in a single market. Sometimes Sydney will be the standout and other times Melbourne, or another capital might be the strongest performer.

Whilst achieving diversification is a challenge, it is something all investors should consider. This is one of the key drivers of a successful long-term investment strategy.

The cash flow dream

The great thing about long-term investing is that you lock in your purchase price when you buy the property but your rental income has the potential to grow every year with the market. This means your cost base is fixed, but the earning potential of the property can grow in perpetuity.

Imagine earning rental income today on a property you bought 20 years ago. This is where the cash flow dream becomes a reality.

Use these seven important factors when deciding on your next investment purchase and whether it fits in with your long-term buy and hold strategy.

For more insights on what is involved in property investment take a look at our guide to the ongoing expenses of holding investment property, our first-time investor FAQ and tips to secure a good investment.