The Number #1 Thing New Investors Get Wrong...

The “Back Yard” Myth...

Did you know that most property investors buy their first investment property in their local area?

It's true. And it kinda makes sense, right?

It feels like a 'safe' option, because 1 - you know the area, and 2 - you can drive past to check in on your investment and make sure everything is okay.

Sound familiar?

I’m gonna let you in on a secret

Buying in your back yard is one of the best ways to guarantee you’ll buy a property that under-performs...

And there’s NOTHING 'safe' about spending hundreds of $1000’s of dollars (and possibly your life savings) on an under-performing property!

So why does buying in your back yard put you at risk of buying an under-performing property?

There’s a couple of reasons.

The first is - out of ALL the areas in Australia...

YOUR suburb and its immediate surrounds are highly unlikely to be one of the best growth areas.

It’s just statistically really unlikely, and by defaulting to your own neighbourhood you’re taking a very expensive punt on its investment potential.

The second reason is that while you ‘know’ your local area...

It’s unlikely that you know it the RIGHT WAY.

Sure, you know it has a nice park around the corner, and that local coffee shop is BOMB...

But - hot tip - hoards of people aren’t moving to your area for the coffee.

There’s much more that goes into pin-pointing a high-performance suburb...

The kind of suburb that will provide the sustained, long term growth and cash-flow you can bank...

And unless you’ve FULLY researched your own suburb against a thorough checklist of investment metrics...

AND it’s come out on top...

The odds are super high that you’re going to be choking your investment success from the start.

So if you're new and considering buying locally...please be sure to thoroughly research your area from an investment perspective BEFORE pulling the trigger.


(PS - this is my backyard...beautiful place to live...amazing lifestyle...but a pretty terrible place to invest! )

 

Not if you purchased in 2001 and sold in 2007. You would have tripled your investment

But you could say this about many suburbs in Perth. Unfortunately Mandurah is really hurting

 

Anyone can get lucky. But is getting lucky a good investment strategy? Probably not.

 

I will let you in on a couple of little secrets, where ever you invest will be somebodies back yard. The grass is not all ways greener on the other side of the fence thinking that is a common mistake. Most area's have common drivers that give outperformance in select posistions , Being local you should have contacts, networks, be able to observe and have insight into nuances and drivers. that give you an edge. Buying local can be the best place to get blooded .

 

I agree

 

I agree - but most new investors default to their own neighbourhood, instead of actually researching drivers. Then it's a put it on black scenario.

I'm not saying don't invest locally - just don't default to it. Learning the skills is important.

 

I swear I thought you cut and pasted from a property spruiker spiel

 

Glad you clarified this. My own backyard has done extremely well for itself over the last 20 years. It's actually frustrating that, "Don't invest in your own backyard", has been a bit of a misunderstood mantra for at least that long.

It's also been something that's been misused by spriukers. Plenty of them preach not to invest locally, instead invest in <insert location 2000km away>. We all know they're recommending lousy properties that people will have trouble performing their own due diligence on because they can't easily access it.

 

it worked for me, yes, some luck but also paying attention to markets

what has saved my bacon is Diversifying into other markets that were rising ie Syd and Melb

if I just played in Perth market I would have gone backwards

 

Wasn't it Buffet who said diversification was over-rated?

I have followed a renovate and sell strategy starting around 1970 when finance and leverage was a thing of the future. First property a 12 foot wide 2 up 2 down terrace in Erskineville (then known as Irksomeville - 2nd worst suburb on the Sydney socio-economic league table - but so close to Mascot that planes cannot turn sharply enough to overfly it. I could see the start of gentrification and later bought the terrace next door for $7,500 - a rent controlled property from the 1940's (yes it was "a thing") so no maintenance since WW2 but I knew the tenants were about to move on. Would never have known without it being very local. Sold both properties after six years for a 5x profit after costs - and no CGT in those days.

 

yes we could have diversified more

but we could not have held as many properties without some of the maintenance/renovation ourselves

 

Ha! Oh no!

I avoid them completely so might have to pay more attention!

(Not exactly the look I'm going for! )

 

It's a fair point, that there's a huge investable market out there yet a lot of people have this real preferences to stick within a very narrow circle of their own comfort zone. Applies equally to diversifying out of property into other things like equities etc.

Diversification in my opinion is absolutely vital. If 95% of your net worth sits in a 10k radius of residential bricks and mortar that is an exposed position to be in, regardless of how good the fundamentals seem.

 

Absolutely - I actually didn't realise about the spruikers, but I can see how it would fit.

I'm not against buying locally at all - if the research is done, and it fits with the strategy, then that's perfect!

But for new investors, there's usually very little research, and equally as little strategy, and then it's problematic.

 

I would've thought the biggest fault was buying the property you want to live in ... rather than a property that rents well in all markets (moves up to when times are good, down to when times are bad)

 

yep, getting too emotionally attached/involved in your IP

buying an ip in your backyard, I cant imagine to be a huge issue unless you live in a mining town, or you buy 20 of them

 

There's a number of portfolio reasons that aren't often appreciated.
- Diversification. Manages risk across a portfolio by diversifying locations and return factors.
- Finance risk, all LVRs tied to the same valuation. Its one of the core risks of cross securitisation. Buying properties all the same gets you a similar result given the correlation factor between then.

In saying that, knowing your market can take you pretty far on individual deals too if your well researched/savvy. I don't think the majority of retail investors actually fit into this camp though.

FYI Jess, thought the same as @TMNT (esp the words 'let you in on a secret').

 

I have always felt that diversification across asset classes and currencies was more important than diversifying a single asset class by location.