Real estate investment: consider looking beyond your backyard

Investing close to home is popular among landlords, but looking beyond your city, state or country can pay off too.

Many of Australia’s 2.2 million property investors like to put their money in places where they’re familiar- often their own suburb.

But this tactic funnels all their money into just one spot, and if there’s changes in demographics, economics or a big ugly government project, things can turn sour very quickly.

A good way to spread risk and potentially improve long-term investment returns is to look beyond your own backyard. Way beyond your own backyard.

Fortunately real estate investment has many broad options, and here’s what investors need to consider.

REGIONAL

Property prices in regional Australia are generally below capital cities, and buying outside the big smoke has been a successful strategy – especially lately with annual price growth of 26 per cent.

But investors still need to do their research. Some regional prices can slump quickly, especially if they’re linked to industries such as mining.

CoreLogic says the regional median home value today is $552,000 – half that of Sydney but still more than Perth ($531,000) and Darwin ($496,000).

As the pandemic prompts more people to move to the regions for a better lifestyle, buying a bargain in this space has become harder than it used to be.

INTERSTATE

Each state has a different real estate price cycle, which gives investors a great opportunity.

Property investments do best when measured over decades, but if you buy at the right time of a cycle you won’t get caught sitting on real estate that goes nowhere for the next 5-10 years.

Investing in overseas property is often best done through a real estate investment trust.

Land tax is a big hit on real estate investors and can be lowered dramatically by people who buy properties interstate, because each state has different land tax rules and thresholds that are more expensive for those who buy more properties. If, for example, you own $2 million of land in just one state, you’ll pay much more in tax than if you’re spread across multiple states.

Binnari Property managing CEO David Hancock says many investors can find properties interstate at a lower price and higher rental yield than their own city.

But he warns that people need to have a “deep understanding” of the area, including lifestyle factors, and should be wary about buying sight unseen if they don’t have a property professional helping them.

“You don’t want to invest in an area or property type which the locals know isn’t overly desirable, but from a marketing brochure may seem to tick all the boxes,” Mr Hancock says.

People with smaller budgets could consider fractional property investing interstate, where you buy a small slice of a home and share in its income and expenses.

INTERNATIONAL

Here’s where things can get really risky.

Even though you might fancy a London or New York property, investing overseas throws up a pile of fresh challenges as you’ll have to understand another country’s tax and investment laws, rental systems and market challenges.

Plenty can go wrong, and has in the past for many investors. While London and New York are close to Sydney prices, median US real estate values in Florida and Texas are below all Aussie capital cities.

If you want exposure to offshore property, it might be simpler to invest in a real estate investment trust (REIT) that spreads your money across several properties in several sectors and probably several countries.