After putting many of these strategies to the test myself, I realized that the issue is not the strategy itself—which is just a tool—but rather how well the tool is used by the person at the right time, in the right place, and in the right way.
If you choose a property in what you believe to be the best suburb at random over a 30-year period, you will find that there are times when it will outperform the market average and times when it will underperform the market average.
At the end of the period when it is outperforming the average, many property investors jump into historically high-growth suburbs and stay there for 5-7 years during the underperforming period. Naturally, this could alter their perception of property investing as a whole!
There will never be a suburb that is the worst place to invest.
If you choose a property in the worst neighborhood you can think of from 40 years ago and compare it to a property in the best neighborhood you can think of over the same time, you’ll find that they both increased over the long term at an average of 7-9 percent per year.
As a result, the average house price in Melbourne and Sydney in the 1960s was $10,000. The worst property at the time may have cost 30% of the median price, which at the time was, say, $3000. In these cities, the median home price today is approximately $600,000. The worst suburb is still about 30% of that, or about $200,000 for a house. Show me where you can still find a house in these cities that is still worth approximately $3,500 if you believe that a bad suburb will never grow.
When choosing a suburb, many novice property investors use median price growth as a guide. Concerning the median price, a few points should be mentioned:
Based on the number of sales during a given period, we comprehend how the median price is calculated as the middle price point. We can discuss the median price for a specific suburb on a specific day, week, month, year, or even for a longer period of time. As a result, the median price can be severely distorted by an influx of new stocks or low sales volume.
Median price growth is frequently overstated in an older suburb. This is due to the fact that it does not take into account the substantial sums of money that people spend renovating their homes or the subdivision of large blocks of land into multiple dwellings, both of which can account for a significant portion of the entire suburb.
Median price growth tends to be lower than it actually is in newer suburbs. This is due to the fact that it fails to account for the fact that both the land and the buildings are getting smaller. For instance, in 2006, you could purchase a 650-square-meter block of land in a newer suburb of Melbourne for $120,000; five years later, however, the same amount of land—325 square meters—will cost you $260,000. That equates to a staggering 34% annual growth rate over the course of five years; however, since median prices are currently based on much smaller properties, this growth in median prices will never be reflected.
People stop looking at the cost of carrying the property when the median price rises. You are out of pocket by 5% annually when you have a net rental yield of 2-4 percent and interest rates of 7-8 percent. This does not include the money you need to periodically maintain and fix your property.
You won’t get the best returns on your money if you buy and keep the same property forever.
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