Before you buy your next property, ask what you’re trying to achieve
“Where should I buy next?”
It’s one of the most natural questions for a property investor to ask.
- Which city?
- Which suburb?
- House or unit?
- New or established?
- Where are prices likely to grow?
- Where can I achieve the best rental yield?
All reasonable questions.
But they probably shouldn’t be the first ones.
Before deciding what or where to buy, there is a more fundamental question:
What are you trying to achieve?
Because until you understand the purpose of the investment, it is difficult to determine what the right investment actually looks like.
Property is the investment vehicle, not the objective
People don’t generally invest in property simply to accumulate buildings.
They invest because they want property to help them achieve something.
- That might be building long-term wealth.
- Creating additional income.
- Preparing financially for retirement.
- Building an asset base outside superannuation.
- Diversifying existing investments.
- Providing greater financial flexibility in the future, or
- Establishing assets that can eventually be passed to the next generation.
Different objectives can require different strategies.
Yet investors can sometimes begin at the opposite end of the process.
They find a property, become interested in it and then try to make it fit their financial plan.
Strategic investing reverses that sequence.
First establish the objective.
Then determine the strategy.
Then consider whether a particular property helps execute that strategy.
Start with where you are today
Before thinking about the next investment, understand your current position.
- What assets do you already own?
- How much debt do you have?
- What equity is available?
- What does your household cash flow look like?
- How stable is your income?
- How much financial buffer do you maintain?
- What other investments do you hold?
- How much borrowing capacity do you have?
- And what significant financial changes could occur over the next several years?
An investor with substantial income, strong cash reserves and a long investment timeframe may be able to tolerate risks that would be inappropriate for someone approaching retirement with limited surplus cash flow.
Likewise, an investor who already owns several properties concentrated in one city may need to think differently from someone purchasing their first investment.
The next property shouldn’t be considered in isolation.
It becomes part of everything you already own and everything you already owe.
Define what success actually means
“Building wealth” sounds like an objective, but it is still very broad.
What does building wealth mean to you?
- Is the priority capital growth over the next 15 or 20 years?
- Do you need the investment to produce stronger income?
- Are you trying to create sufficient assets to reduce working hours in the future?
- Is there a particular retirement income you are working towards?
- Are you attempting to build equity that could eventually help fund another investment?
The clearer the objective, the easier it becomes to assess potential investments against it.
It also provides something important that property investors can easily lose during a strong market:
A reason to say no.
- A property can be attractive.
- It can be in a desirable suburb.
- It can be well presented.
- Other people can be competing to buy it.
None of those things establishes that it belongs in your investment strategy.
Growth and cash flow are different considerations
Two properties with the same purchase price can play very different roles within an investment strategy.
- One might offer stronger current rental income but more modest expectations for capital growth.
- Another might require a greater contribution from the investor each year but have characteristics that the investor believes provide stronger long-term growth potential.
Neither is automatically better.
The relevant question is what role the property needs to perform.
- Cash flow matters because an investment has to be financially sustainable.
- Capital growth matters because growth in asset value can be an important component of long-term wealth creation.
- Risk matters because neither rent nor capital growth is guaranteed.
The challenge is finding an appropriate balance for the individual investor rather than maximising one number in isolation.
This is why searching for “the highest-yielding suburb” or “the fastest-growing market” can be the wrong starting point.
The highest number isn’t necessarily the best strategy.
Your timeframe changes the decision
Time is one of the most important variables in property investment.
Property has significant transaction costs.
Buying can involve stamp duty, conveyancing, inspections and finance costs. Selling can involve agent fees, marketing expenses, legal costs and potentially taxation consequences.
That makes the intended holding period important.
An investor with a 20-year horizon may be able to look through periods of market weakness that could be much more significant for someone expecting to sell within several years.
Your stage of life matters too.
Someone in their thirties accumulating assets may approach debt very differently from someone preparing to transition into retirement.
The question isn’t simply whether an investment looks attractive today.
It is whether the investment is likely to remain appropriate as your circumstances change.
Understand how much risk the strategy can withstand
Property investment involves uncertainty.
- Interest rates can change.
- Property values can fall.
- Tenants can leave.
- Maintenance costs can arise unexpectedly.
- Tax rules and government policies can change.
- Personal circumstances can change too.
An effective strategy therefore needs to consider more than the expected outcome.
It should consider what happens when things don’t go according to plan.
- What happens if the property is vacant for an extended period?
- What happens if a major repair is required?
- What happens if interest costs remain higher than expected?
- What happens if household income temporarily falls?
- What happens if the property’s value declines and remains below its purchase price for several years?
If one of those scenarios would force the investor to sell at an unsuitable time, the strategy may be carrying more risk than initially appears.
Stress-testing isn’t pessimism.
It is part of being prepared.
Your next property should complement what you already own
For investors building a portfolio, the next purchase introduces another consideration.
Concentration.
- If several properties are located in the same market, they may be exposed to many of the same economic, employment, regulatory and supply conditions.
- If every property relies heavily on capital growth while producing significant negative cash flow, the combined portfolio may place increasing pressure on household finances.
- If every investment targets high rental yield in locations with similar economic characteristics, a different form of concentration may exist.
Diversification doesn’t mean automatically buying in a different state every time.
It means understanding where the risks and return drivers already sit within your portfolio and deciding whether the next investment increases or reduces those exposures.
Again, the question isn’t simply:
“What’s a good property to buy?”
It is:
“What does my portfolio need next?”
Sometimes the next move isn’t another purchase
This is an important point.
Building a property portfolio doesn’t mean purchasing another property simply because borrowing capacity or equity becomes available.
Sometimes the stronger strategic decision may be to wait.
An investor might benefit from reducing debt.
- Building a larger cash buffer.
- Improving household cash flow.
- Reviewing existing loan structures.
- Addressing an underperforming asset.
- Waiting for income or employment circumstances to become clearer.
- Or simply allowing an existing portfolio time to mature.
Available equity is not the same thing as a requirement to use it.
Borrowing capacity is not an investment strategy.
There should be a reason for the next purchase beyond the fact that another purchase is possible.
Tax should support the strategy, not create it
Tax considerations inevitably form part of property investment.
Depending on an investor’s circumstances and the property involved, issues such as deductible expenses, depreciation, negative gearing and capital gains tax can materially affect the financial outcome.
They should be understood before making an investment decision.
But a tax outcome should not turn a poor investment into a good one.
An expense doesn’t become desirable simply because part of it may be deductible.
Likewise, an investor shouldn’t purchase a property primarily because of a potential tax benefit without understanding the underlying economics of the investment.
The property needs to make strategic and financial sense first.
Tax planning then forms part of structuring and managing the investment appropriately.
Work backwards from the goal
There is a simple way to change the property investment conversation.
Instead of beginning with:
“Where should I buy?”
Start with:
“What am I trying to achieve?”
Then work backwards.
- What financial position would help you achieve that goal?
- What investment strategy could reasonably support it?
- What level of risk can you tolerate?
- What cash flow can you sustain?
- What timeframe are you working with?
- What role does your existing portfolio already play?
And only then:
What type of property, in what type of market, could appropriately contribute to that strategy?
That sequence won’t guarantee a successful investment.
Nothing can.
But it creates something far more valuable than another property recommendation.
It creates a reason for the investment to exist.
Strategy before property
Property markets will continue to change.
- The suburb attracting attention today may be replaced by another tomorrow.
- Interest rates will move.
- Government policies will change.
- Property forecasts will be revised.
- And the next investment “hotspot” will inevitably appear.
Your long-term objectives should provide the anchor through that noise.
At IFP Advisory, we believe property selection should be the result of an investment strategy, not the beginning of one.
Before asking where you should buy your next property, first understand why you need it.
Sometimes that will lead you towards the right property.
And sometimes it may tell you that the right property, for now, is no property at all.
For further insights on property investment, avoiding common pitfalls and staying informed about market conditions. reach out to John Tsoulos or Frank Pennisi at IFP Advisory on (08) 8423 6176. Your investment success depends on making informed, strategic decisions.
IFP Advisory is an Accredited ASPIRE Property Advisor Network advisor and all professionals are Qualified Property Investment Advisors (QPIA). Property investing is about purchasing a property that aligns with your goals and investment strategy. You should never be sold an investment. Know your numbers! If you invest wisely and strategically, the Australian residential property market can be a rewarding venture.
This report is intended for informational purposes only and does not constitute financial or investment advice. Past performance is not indicative of future results. Readers should seek independent professional advice before making any investment decision. This article contains general information only and does not take into account your personal objectives, financial situation or needs. Property investment involves risk, and past performance is not a reliable indicator of future performance. Tax and financial considerations should be discussed with appropriately qualified advisers in relation to your individual circumstances.
