Should I buy my first investment property in Broken Hill?

Hi Margaret,

I'm a new investor and I'm about to invest in a property in Broken Hill. The property is vacant at the moment but the real estate has advised a potential rent of $200.

I'm also yet to do a building and pest inspection. 

Would you be able to give me some advice?

Kind regards,

Ashis

When new investors begin the process of choosing their very first investment property, usually they are motivated and guided by the desire to get something as affordable as possible.  In doing so, they consider a price range within their budget, and then go looking for a house to match.  Next, they usually find out the rent return and if it seems as if it will provide a reasonable cash flow, they believe they have a good buy on their hands.

The problem with this approach is that, while it means that you will buy something within your comfort zone in terms of price, with a rent return likely to cover most costs so that your weekly personal cash flows are not too badly impacted, it completely ignores one of the most important features of successful investing – and that is buying a property which will grow and so increase your net worth.  While getting a neutral or positive cash flow is indeed of considerable importance (as highly negative cash flows can cause financial distress and potential early exit), owning property which never grows (or grows very little) will do no more for you than never owning property at all!.

Broken Hill, in my opinion, falls within the category of an area which has affordable housing  and rental yields of over 6%.  However, it has a population which is only not growing; in 2011 it lost 80 people!  There are over 500 properties currently listed, with only four people looking per property available, as compared to a state average of 20.  Combined with a lack of employment opportunities, these facts indicate that there are simply no drivers for property price growth and you’re likely to be left with a property which does nothing in the short and medium term, and likely in the long term too.  You will essentially buy yourself a headache (which most properties are, at some time), with no capacity for a reward at the end!

While I am definitely not a proponent of spending up big when it comes to buying investment property, I believe there is far more risk in buying a cheap property with no demand drivers than there is in buying a more expensive property in an area where you have confirmed employment opportunities, population growth and suitable provision of infrastructure.  Such an area can still have a rental yield sufficient to cover your costs and not stress your budget today,  and in addition to this it can provide growth of your asset and the capacity to leverage into more properties, and thus build a larger portfolio.

Regards,

Margaret

She is the founder of Destiny.

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