Are you serious about building wealth?
Residential property has long been one of the best ways to grow wealth in Australia.
But here’s the thing…
Not every property will deliver maximum returns.
Some will skyrocket. Some will stagnate. Figuring out which is which is crucial to maximising your wealth.
In this article we’ll show you how to evaluate the long-term growth potential of residential property investments.
Let’s jump in!
What you’ll discover:
- Why Property Investment Delivers Strong Returns
- Key Factors That Drive Long-Term Growth
- How To Spot High-Growth Opportunities
- Common Mistakes To Avoid
Why Property Investment Delivers Strong Returns
Before we dive into the nitty-gritty of evaluating growth potential, let’s answer one important question…
Why invest in property in the first place?
If you think property investments deliver meagre returns, you’re in for a surprise.
Australian residential real estate has posted average annual returns of 10.2% over the past two decades.
That’s rental income combined with capital growth. All before taxes.
The total market value of residential properties in Australia recently crossed $11.366 trillion.
Yes, trillion with a “T”.
Residential real estate is one of the largest wealth-building assets available to everyday Australians.
And not only has property outperformed other asset classes over time, it’s also been far more stable.
Unlike the stock market, property generally doesn’t swing wildly. Instead, it delivers consistent, predictable growth year after year.
Of course, you don’t actually have to buy property directly.
Investments like first mortgage investments can give you exposure to real estate returns without the day-to-day hassles of being a landlord.
But if you want to know how to really make serious money from property, you need to know what makes a high-growth investment.
Key Factors That Drive Long-Term Growth
The first step to choosing a wealth-building property is understanding what factors drive growth.
As you might guess, not all properties and suburbs will double in value while others will stagnate.
The secret to success is knowing what to look for ahead of time.
So here are the most important drivers of long-term capital growth.
- Population Growth
- Infrastructure Development
- Supply Constraints
- Employment Opportunities
Population Growth
Areas with strong population growth will also have rising property values.
Simple supply and demand really. As more people arrive, more housing is required. So values go up.
Cities such as Brisbane, Perth and Adelaide have seen significant population growth in recent years as interstate migration shifts focus away from Sydney and Melbourne.
Investors are already cashing in on this boom.
Infrastructure Development
New infrastructure such as roads, train lines, hospitals, schools and parks all add value.
You know the drill. When a new road or train station gets announced in an area, property values increase.
These sorts of developments make an area more liveable and desirable to current and future buyers.
Supply Constraints
Buyers will bid up prices when there aren’t enough homes available.
Australia is in the midst of a chronic housing shortage.
Too much demand, not enough supply.
Housing completions per capita (new homes being built divided by population growth) have bottomed out at their lowest level in 38 years.
It’s no coincidence that we’re also in a massive price boom.
Supply constraints = higher prices.
Employment Opportunities
Areas with healthy local job markets support strong property prices.
Look for properties near major employment hubs and business districts, transport interchanges and industrial areas.
These zones attract workers and with them, housing demand.
Areas with less diverse employment options will always struggle to attract new demand.
How To Spot High-Growth Opportunities
Ok, great, you know the main drivers of long-term growth…
Now how do you actually find properties with great growth potential?
Let me give you the best advice.
- Research Historical Performance
- Analyse Rental Yields
- Monitor Government Planning
- Consider The Fundamentals
Research Historical Performance
A good place to start is by looking at historical growth performance.
Go back 5, 10 and 20 years and see how much the value has increased.
Ideally you want to see steady, consistent growth.
But remember, this is just one factor.
Analyse Rental Yields
Rental yield is the amount of income a property is earning compared to its current value.
The higher the yield, the better.
Look for properties where the rental yield exceeds the average for the area.
But again, don’t focus on this number alone.
Factor in the other things mentioned above.
Monitor Government Planning
Planning information on development applications from local councils tells you what’s on the horizon.
A new shopping centre, transport link or residential development will all increase future property values.
Stay in the know about what’s being built near your target areas.
Consider The Fundamentals
Here are some basic questions to ask yourself about the fundamentals of any property:
- Is the area close to work?
- Are the schools and amenities good?
- Is public transport nearby?
- What is the resident demographic?
Good properties in great locations with strong fundamentals will outperform over the long run.
Common Mistakes To Avoid
There are a few traps I see even experienced investors falling into when evaluating growth potential.
You should avoid these too…
- Chasing Hot Markets Too Late
- Ignoring Holding Costs
- Overlooking Exit Strategy
- Emotional Decision Making
Chasing Hot Markets Too Late
How many times have you heard a new hot market being touted?
Be it suburbs or regions, as soon as everyone is talking about it, the best gains are usually already behind us.
Smart investors are aware of where growth potential is before the crowd turns up.
They position early and then enjoy the benefits as the market heads north.
Ignoring Holding Costs
Capital growth doesn’t mean anything if your holding costs are racking up.
Rates, insurance, maintenance and management fees are all ongoing expenses that will eat into your profits.
Overlooking Exit Strategy
Always think about how and when you’ll exit an investment.
Properties can be harder to sell depending on the type, location and market conditions.
Some, such as apartments in oversupplied areas or unusual builds, can be more difficult to offload when the time comes.
Emotional Decision Making
Ok, here’s a big one…
Don’t fall in love with a property.
Investment decisions should be made based on data and logic, not emotion.
Stick to your criteria and if a property doesn’t stack up, walk away.
Putting It All Together
Evaluating growth potential doesn’t have to be complicated.
It’s a matter of understanding the fundamentals that underpin long-term property values and ensuring your investments match up.
Population growth, infrastructure, supply constraints and local employment all matter.
The best performing investments tend to have a few key traits in common.
- In growing areas
- Near good jobs
- Limited new supply
- Solid infrastructure
- Good rental demand
With the right due diligence, you can identify properties with genuine long-term growth potential.
Tying It All Up
There you have it, the fundamentals of evaluating long-term residential property growth potential.
Property investment remains one of the best ways to build serious wealth in Australia.
The key is to do your homework before buying to ensure you’re maximising your returns.
Understanding what drives long-term growth is the first step to making smarter investment decisions.
Choose the right properties and you’ll build a fortune. Get it wrong and you’ll be left scratching your head.
Remember:
- Do your research into historical performance
- Consider the key growth drivers
- Pay attention to the fundamentals
- Don’t fall in love with a property
Apply these principles to your next investment opportunity and watch your portfolio grow.
Start evaluating your next deal today!
