Episode Details

There is one property investing golden rule that is more important than everything else. And if you nail this ‘one thing’, you are guaranteed to build wealth over the long run. This statement might sound sensationist, but I honestly cannot overstate this point.

The golden rule is that the quality of the property you invest in will drive its long-term investment returns. If you invest in an average quality property, your long-term returns are likely to be average. Of course, if you want above average returns, you must invest in above-average quality property.

This golden rule applies to all other assets classes as well, including shares, bonds, commercial property and so on.

What does ‘quality’ mean?

A quality property has the necessary attributes that sustains a level of buyer-demand that perpetually exceeds supply. This imbalance of supply-demand results in appreciating value/prices in the long-run. A high-quality property is often referred to as investment-grade.

It is worth discussing the factors that impact supply and demand.

In investment-grade locations, supply is fixed or diminishing

Supply is probably the easier of the two factors to understand and ascertain. Supply refers to both land supply and dwelling type/style.

Regarding land, it is important that the supply of land is fixed and finite. Consider a well-established, blue-chip suburb. In these locations there is rarely any vacant land available, often within a 10km to 20km radius. And there is no way that any new land can by ‘released’ for sale. However, in outer suburbs, land supply can be abundant due to land releases within a 20km radius. The further a property’s location is away from available vacant land, the tighter supply will be.

Property type and style also affect supply. For example, in high land value locations, the supply of houses rarely changes, because its rarely economical to complete small sub-divisions in high-land-value locations, so the number of houses/townhouses remains unchanged. However, the supply of apartments can more readily change e.g. when a developer buys a commercial site and builds a residential tower. An example of a property type on the opposite end of the scale is Victorian houses. Virtually no one is building Victorian houses anymore, so their supply is finite. In fact, some probably get demolished every year, so supply is probably diminishing.

Buyer-demand perpetually exceeds supply

Buyer-demand refers to the size of the pool of potential buyers that desire to own property in a particular location and can afford to do so.

When the number of buyers exceeds the number of sellers, property prices tend to rise. Of course, that’s because buyers must be willing to pay more to successfully purchase a property.

It is important that you invest in locations when buyer demand substantially exceeds supply. Notionally, there might be 10 buyers for every one seller. This level of imbalance in supply and demand will ensure that property prices will withstand changes in supply (e.g. an unusual number of properties for sale) or demand (e.g. an economic recession causes buyer demand to reduce). Despite what happens, it is likely that the number of buyers will always exceed the number of sellers and prices will be supported.

When considering a property investment, it is wise to consider who might like to own said property. It is important that the property appeals to a variety of types of buyers. Again, notionally, if you have 10 potential buyers (as mentioned above), 3 of them might be self-fu