Have You Broken This Unwritten Real Estate Investing Rule

Real Estate Investing can be tricky, especially when you’re just starting out. One of the keys to investment success is finding the right location, but according to a recent journal report the majority of investors might be doing it wrong.

I’m sure you’ve read the news. It looks like the housing drought is well and truly over with another point .9% rise over the past month nationally. But that doesn’t mean we are seeing the green everywhere. Real Estate investing now as much as ever comes down to a few key factors.

Asking Price Property Value Location

Everyone of us have heard the old line “Location, Location, Location” but when it comes to a recent report published in the October edition of the Pacific Basin Finance Journal, it appears many investors didn’t receive the memo. The report titled Home advantage: the preference for local residential real estate investment was written by Maria Yanotti a lecturer of Economics and Finance at the University of Tasmania and Dankia Wright a lecturer in finance at the University of Sydney. The report examines proprietary data from a major bank between 2003 and 2009 covering 1.15 million residential mortgage applications.

The findings suggest Australian investors may be putting themselves in avoidable risk by choosing to only invest close to home. The findings of the report show that in that period more than 2 in every 3 Australians were purchasing an investment property close to where they live. So for example say a potential investor lives in Point Cook the majority would buy in Point Cook or in a surrounding suburb.

WHY AUSSIES INVEST LOCALLY

There are a number of reasons why so many Aussies are taking a buy local approach to real estate investing and it could be setting them up for disaster. Key reasons include

  • Feeling confident as they know the area
  • Being able to easily inspect the property
  • Saving time and money on traveling to property
  • Having an arguably bias affinity to an area

REIA (Real Estate Institue of Australia) recently revealed 1 in 5 investors self-managed their property which is another contributing factor for selecting a property close to home.

Looking at real estae investing through the magnifying glass

Limiting Options

Obviously there are a number of perceived benefits to buying in an area close to home For one if an area is good enough for you to live in why wouldn’t potential renters be fighting to rent out your property as well. It’s an option option taken by many investors specifically newer ones. The issue is that as with any kind of investing when it comes to real estate investing a successful strategy is one that diversifies risk.

By purchasing multiple areas in the same location investors are multiplying their risk should that specific market face a decline. Similar to a healthy stock portfolio successful investors will spread investments across a number of options to mitigate the potential of a blanket loss. The vast majority of residential Real Estate investing is done by home owners with a single investment property. This means they have a limited opportunity to diversify and as the report shows the vast majority are missing this opportunity.

RISKS OF INVESTING IN LOCAL REAL ESTATE

  • Having multiple properties in the same geographical location increases risk of defaulting and foreclosures in case of an isolated market downturn
  • Drastically reduces chances of finding best suited property to buyers requirements
  • Increases likelihood of missing out on best performing suburbs

The benefit of Australia is we have multiple markets nationwide and numerous markets within those markets even within a single city. Therefore the opportunity to safeguard against a potential decline in one area certainly exists.

The phenomena of buying within a limited pool isn’t limited to property. It can also be observed in stock market investing in that newer investors are more likely to invest in companies within their own country. Whilst this strategy is often perceived as more cautious, by not looking at the entire scope of opportunity less sophisticated investors are sincerely limiting their growth potential.

Unfortunately by implementing a real estate investing strategy that only sources local property Australians are opening themselves up to heightened risk and lowered opportunity. The findings in the report suggest that through proper education Aussie Investors can minimise their exposure to failure which in turn can help strengthen the economy.

We are seeing a strengthening market thanks to a number of factors combining in the second half of the year including three interest rate cuts. Australia is certainly providing fresh investment opportunity but the advice from the experts is the best buys are unlikely to be at your doorstep.