5 Key criteria of growth properties that build your wealth
Who is this article for?
Are you looking to secure your financial future and retire from the workforce with as much wealth behind you as possible? Perhaps you’re looking to set up a secondary income stream that will supplement your current income over a period of time?
If building your wealth through investing in real estate is one of your goals, then learning the five key criteria of growth properties will be effective in helping you achieve it. Whether you’re a seasoned investor or at the beginning of your real estate journey, having a sound understanding of growth properties will make all the difference when it comes to accumulating lasting wealth.
Why should you invest for growth, not cash flow?
Investing in property should be about long-term wealth building. Employing a strategy that aims to build a portfolio of positive cashflow properties may mean you enjoy a small profit immediately, but over time, investing for capital growth will almost always earn you a greater final return.
Strong capital growth may be defined as an increase of at least 5% p.a. So consider this: if you purchase a property for $400,000 and it grows in value by 5% it will add $20,000 to your wealth.
Alternatively, a cashflow property may generate a return of $1-2,000 per year, but experience little to no growth year-on-year. Which would you prefer to have in your portfolio?
How should you use this article?
The primary aim of this article is to educate both new and seasoned investors about the 5 key criteria of growth properties that will build their wealth.
The information available in this article should be used to get to know the characteristics of quality growth properties, and help investors begin to identify the types of properties that will help them to achieve their goals.
This article may also be used to help investors learn how property investing works, while also gaining an understanding of the risks of capital growth properties.
How growth properties build your wealth
Investing in growth properties can help you accumulate wealth through two means: by delivering rental yields and through capital appreciation.
It is important to note that achieving both high rental yields and high capital growth can be challenging initially. This is because growth properties are generally located in central, sought after suburbs that are close to transport, employment and other amenities – which makes them more expensive to purchase.
Over time however, as rents increase, your property should transition from being negatively geared to positive cashflow.
As well as eventually delivering a high yield, investing in growth properties over a longer period of time gives you the benefit of ‘time in the market’, which can see your property’s value double or triple – and then some.
5 key criteria of growth properties
The first criteria to look out for when investing in a growth property is a central location. Generally, cities with populations of above 50,000 are ideal, as this ensures a strong enough population to minimise vacancies and maximise rental growth.
The size of the population isn’t the only important factor; the second criteria is that the population must also be growing. An increasing population translates to an increasing demand for a place to live, which puts pressure on the housing market and drives price growth.
Linked to this is the third factor present in a property market where real estate is appreciating in value: investment of private money. If big businesses and private developers are spending money to build shopping complexes, retail superstores and entertainment precincts in an area, you can bet they’ve done a lot of research to ensure strong population growth to support their projects.
The fourth criteria to look for when reviewing investment locations is an area where the economy is based on more than one industry. Areas that are solely dependent on one particular industry, such as mining, tourism or health, are susceptible to high unemployment rates and a slowing economy in the event of an industry downturn. This can impact vacancy rates and rental returns for your investment property.
The fifth and final criteria of a growth property is the presence of strong and growing infrastructure in the area. There are a number of sources online, including state government and on council websites, where you can research approvals and upcoming project related to new bridges, roads, trains and other infrastructure that will improve the livability of the region.
The risks of capital growth properties
While capital growth properties will ultimately help you to build your wealth, they are not risk-free investments.
There are financial risks initially, as you may have to contribute towards the costs of owning the property each week from your own salary. The cost of owning the property will generally be more than the rental income received, so you’ll need to fund the weekly shortfall – whether it’s $20 or $200 – yourself.
For instance, if the property rents for $500 per week but it costs you $650 (once the mortgage interest, council rates, property management fees and insurance are considered), then you’ll need to find an extra $150 per week to pay your property bills.
On a positive note, you can deduct the majority of these expenses against your income tax under current negative gearing rules, which makes your investment property more affordable to own.
The bigger risk is interest rate increases. Even a small interest rate increase of 0.5% could see you paying an additional $2,500 each year on a $500,000 loan. If yourmortgage increases by 2-3% over time, you could be faced with repayments that are difficult to manage. It’s important to plan ahead financially for potential increases, and if you’re planning to hold onto your investments for the long-term, fixing your rates may be one way to lock in some repayment certainty.
You should also aim to buy in popular rental areas where there is ongoing demand from tenants, as this ensures you’ll have fewer vacancies and will reduce your risk of the property sitting empty.