I have a real issue with property spruikers claiming to know the next hot spot, the inference being that if you buy in these areas you will automatically be making a great investment decision. Particularly as there are so many would-be investors who are trying to identify the next big location in their hopes of striking real estate gold.

The thing that is so rarely talked about is risk. Now don’t get me wrong, there is a time and a place for taking risks in the hope of big capital gains. But this is the realm of serious investors who are educated and experienced (or pay for advice) and who already have substantial equity to back them up. It is not an investment strategy that we advise for first time investors or those with a large debt to equity ratio.

There are two main elements to capital growth. There is the location and there is the individual property. Many people providing property investment advice will focus on buying in the next hotspot to the point where the actual piece of real estate becomes secondary. In fact many of their clients purchase property sight unseen, with decisions made solely based on “the numbers”. We believe that this is the riskiest strategy of all as every suburb and town has a median growth rate, which means that 50% of properties in that area will under-perform. If you are not focused on the actual property and it’s attributes then you run a very real risk of missing out on the opportunity for good capital growth, let alone maximum returns.

The thing that I love about buying real estate is that on one hand it is so simple, the fundamental principals are pretty basic. But on the other hand it is a very complex game, largely because human beings are involved and we often have to be lay psychologists to make sense of it.

One of these fundamental principals applies to capital growth. It is this simple: for a property to grow in value above the median rate for the area it needs to appeal to buyers. So the key to capital growth is understanding what sells well. Brooke and I spent many years as selling agents, and we have stood at the front door of open houses and dealt with often brutal buyer feedback, or lack of feedback as the case may be. As a result we know what sort of property sells well. And we can see when there are simple ways to create buyer appeal as opposed to features that cannot be changed. And we can also see when buyers are being seduced by great presentation and overlook a property’s down-sides.

For this reason, when we are providing property investment advice to our clients, we firstly cast a fairly wide net in terms of location (within our preferred 10km radius of the CBD) and then actively seek the best opportunities within that area. And what makes a good opportunity comes down to the actual property and it’s future saleability.

There is little benefit in filling your head with statistics about projected population growth, infrastructure development, job creation projections etc in order to determine WHERE to buy if you make mistakes in choosing WHAT to buy.

There is possibly no buyer more nervous than a first home buyer. Not only are you scared about what having a mortgage is going to do to your quality of life, but there are high stakes in getting on the first rung of the property ladder. After all, a bad move can cost money if the property’s value drops. Almost equally disastrous is the opportunity cost of a property that does not grow in value, or doesn’t match the median growth rate for that suburb. Not only are you looking for a home, but something to leverage off in the coming years when your growing family demands a larger abode.

So, how do you buy a property that is going to out-perform the median growth rate for the area? The obvious answer is to engage professional help. We hand-hold many first home buyers through this exciting phase of their lives and find it extremely rewarding. But budgets are usually tight and there are many young people out there who we cannot convince to part with the funds required to engage our services. So, if professional help is not an option, you will need to do the research yourself. Really get to know your chosen market and see for yourself which properties attract a lot of buyer interest and which ones don’t. You will probably have to compete harder for a property that will perform above the median. The duds will be pretty easy to buy…

Basically if you look at any ladder, the goal is to get as high as possible. If you can reduce the steps (by making the rungs further apart or by taking two at a time), then you are going to save money in the long term and climb higher in a quicker timeframe. The costs of buying and selling are so high that it makes sense to reduce the amount of property transactions over your lifetime. So the longer your first home will suit your needs, the better.

We often hear advice given to first home buyers to stretch yourself as far as you can afford (get used to being uncomfortable!) as the time before you have kids is the best time to build a solid foundation in the property market. This could set you up to be much more comfortable in future years for two reasons. Firstly, you may not need to upgrade so soon if you buy the largest home you can afford now. But you need to make sure it is in a good area. Alternatively, if you stretch to buy in the best area that you can afford, then you will have a greater chance of higher capital growth than if you compromised and bought in a lesser area. Sometimes, however, you will need to buy a smaller property in order to achieve this.

In his “Property Watch” column in last weekend’s Sun Herald, Mark Armstrong gave some advice along these lines. “Your first property is arguably the most important because, if you choose wisely, this asset will be the one that will set you on your way to building substantial equity through capital growth… When affordability is a pressing concern, it’s far better to buy a smaller property in a high capital growth area, than a larger property in a lower capital growth area.”

We firmly agree.

When you read a strata report that documents a litany of building issues it can be easy to be scared off a property. And sometimes it is a warning of impending inconvenience and cost.

However, it can also indicate a pro-active strata manager and an owner’s corporation that cares about maintaining their investment. In addition to the list of problems, look for a concerted and continued effort to address the issues. And keep an eye out for potential special levies. This is a sign that there has not been sufficient sinking fund levies in the past to cover these expected repairs.