The final question you need to answer before going property shopping is "Where should I buy?" Most people let the dollars and cents dictate their answer. As a consequence, they make money mistakes or at the very least, don't optimise their future financial position. A far better proposition is to understand 'property first principles' and let these heavily influence your answer.
When something is high in demand but short in supply, prices go one way – up. Property prices are no different. So what creates demand? Clearly that's population. If lots of people are trying to get into an area which has only a certain amount of houses for sale that excess demand is going to push prices up. Why would people want to buy in a particular area? Well usually it's because that particular geographical area offers employment prospects. Usually more job opportunities are found in a city area rather than a rural area. Additionally, other factors such as parks, schools, shops, availability of transport options etc all come into play to create desirability and thus demand for a particular area.
The moral of this story is simple: if you're going to put your hard earned dollars in property, whether it's for your own home or for an investment, ensure you buy in a place which has high demand, low supply and plenty of employment opportunities. Do this and a bar won't exist that will limit the future growth in value the property will experience or the rental prices you can charge.
Other than appreciating property first principles, you should be aware of the growth rates in value certain suburbs in your area have experienced. Knowing this will help you choose what suburbs to buy in. For example, if we turn our minds to Auckland, we know that Herne Bay, St Marys Bay, Parnell, Mission Bay, Remuera, Greenlane, Ellerslie and Devonport (to name but a few suburbs) all experienced substantial growth in 2012. The people that understood this in 2011 and 2012, began to buy in Ponsonby, St Heliers, Meadowbank, Epsom and Mt Eden. Why was this? Simple. They could buy in these suburbs at prices less than they would have paid in the areas that had already experienced strong growth. Then all they had to do was sit there and wait for the growth to occur. We call it the 'ripple out effect' and it's a smart concept to understand as it assists you in growing your wealth.
Finally, you will need to cut your suit according to your cloth. If you can't afford a particular suburb, consider buying in the next best suburb. Sometimes you need to settle for what you can buy rather than what you want to buy. Sustainable wealth is frequently built on a step up and step through foundation – a sound notion to bear in mind.
There are many other principles and concepts you should be aware of (e.g. geographical demographics, time compass rule, buying strategies and rules etc) that will help you answer the question 'where should you buy?' – the above are merely some points that come to my little grey cells.
Tune in for my third and final blog on making money through property H1.