Step 3 - Strategy Building
Now that you have a basic understanding of your broader property investing strategy, it is now time to build your specific brief for your next (or first) purchase.
This brief will be unique to your circumstances and will incorporate all the knowledge you have obtained from earlier on in this website and most importantly, input from your team - specifically your mortgage broker. Whether or not you have a buyer's agent, this section will still be relevant to you (it just might be that they help you develop this part).
The below table sets out the core elements of your 'brief' which essentially set out the boundaries for the purchase of your investment property - or in other words, this will dictate the types of areas / suburbs that you will be investing in for this specific purchase (i.e. your brief may change for each further purchase you make).
I have made some suggested responses for you under the assumption you are early in your investment journey and agree with most of the things I have said throughout this website; however, things such as budget and yield are entirely up to you and your mortgage broker to determine together.
Brief Criteria
Budget Range
Market Cycle Timing
Investment Time Horizon
Risk Appetite
Response
[you to insert - e.g. $550,000 to $650,000]
Long term
[Note: this is my suggestion, do whatever suits your strategy]
Low Risk
[Note: this is my suggestion, do whatever suits your strategy]
Overview / Rationale
This is something to discuss with your mortgage broker - you should be flagging with them that your goal is to build a portfolio, not just make one purchase at the maximum end of your borrowing capacity.
Your mortgage broker will discuss this with you (if they are good…) but just to be safe - you need to also assess your budget based on how much money you have to pay for the upfront costs of purchasing a property at a certain price. In particular, this will include (among other things):
Deposit
Stamp duty
Legal / conveyancing fees
Building and pest inspection fees
Buyer's agent fees (optional)
Check out the linked video for more information on the acquisition costs of buying a property.
Honestly, ChatGPT is also decent at this and there are many other websites / resources (including those from the major banks) which will give you some insight into these costs so give it a Google - e.g. the SuburbsFinder one linked in the row below.
Gross Yield
[you to insert - e.g. 4% yield]
This is something to discuss with your mortgage broker - you should be flagging with them that your goals is to build a portfolio so the yield they suggest should be sufficient enough to allow you to purchase another property again in the near future.
You also need to ensure that this yield is sufficient enough for you to comfortably hold the property - to do this you need to understand how much the property will cost you each week at a certain yield, or in other words your holding costs, and how much you can realistically budget each week / month to pay these holding costs.
There are plenty of resources online to help you with a budget and calculating your holding costs, ChatGPT is actually not bad at helping with stuff like this if you ask it the question). For cashflow / holding costs purposes feel free to check out this one by SuburbsFinder (note it doesn't include land tax…): https://www.suburbsfinder.com.au/investment-property-cash-flow-calculator/
Warm Market
[Note: this is my suggestion, do whatever suits your strategy]
As discussed in Step 1 we want to be entering into markets as close to the start of their 'upturn' phase of the growth cycle as possible - i.e. a warm market.
Please revisit the section in Step 1 where we discussed market cycle timing as a refresher on the 'optimal buying window' and when a market is considered 'cold', 'warm' and 'hot'. However, by way of summary, the reason we want to be entering the market here is:
you will capture the most amount of growth possible in cycle; and
you will be entering the market ahead of the rest of buyer herd (i.e. before it is a hot market and in its boom phase) which means there will be less competition and the entry price will be lower.
Just to reinforce this point, this is not a perfect science and shouldn’t be applied rigidly, but I will show you how to best maximise the probability that you are entering a market at a good time of the cycle later on in this website at Step 4.
Also for the record, if you want to enter a ‘hot’ market to get some quick equity gains so you can extract that equity and buy again straight away then go right ahead, that is a perfectly reasonable strategy - but just be careful and make sure the supply and demand metrics we talk about later in Step 4 are still very strong and aren’t starting to trend in the wrong direction, otherwise you might be buying very close to the peak.
In alignment with my suggestion to implement a 'buy and hold' strategy, even though we are aiming to extract equity in the first 1 - 3 years we still want to be investing with a long term horizon - i.e. with a view of holding this property for 7+ years.
This means that we want to be investing in relatively low risk locations.
Whether or not a location is low risk will essentially come down to the economic fundamentals of the area as well as few other factors, such as building approvals, developable land supply, renter-to-owner ratio etc.
I will go through how to identify whether a location is low risk in the next step on this website, but generally, this would mean investing only in:
Major capital cities (i.e. excluding Darwin…); and
Major regional cities (i.e. Geelong, Townsville, Newcastle, Bendigo, Albury-Wodonga and many many more!)
Low risk locations does not mean only investing in major capital cities or blue-chip locations - this is one of the many property investing myths which I will aim to debunk in the next section of the website, so please click through to the next page if you are interested..
If you want to understand more about the types of risk levels in property investing feel free to check out this video from Under450k. Noting again that if you are comfortable with a bit more risk, feel free to try some of the more smaller regional markets - e.g. La Trobe Valley, Horsham, Devonport etc.
It is extremely important that you have a very concrete brief before we move on to the next step where we (finally) start looking at how to find the best suburb for you to invest in, because the more specific you can be on your brief the more effective / efficient your suburb research will be. With that being said, let's start looking at the stuff everyone loves - where to find good suburbs to invest in.