As with any investing strategy, it pays to do your research, before deciding on an area get up to speed on any possible hurdles you may face in financing the purchase, as well as all the standard research that you would do.
If you are looking at trying to take advantage of a boom area, such as we saw several years ago with mining towns, make sure that you check with your Mortgage Broker or your bank that the post code that you are researching is acceptable to the lender. Many lenders will limit the amount of the loan compared to the land value (LVR) if the risk to the lender is perceived as being higher.
If you take it from the lenders’ point of view the property that you are intending to borrow money from them to purchase is being offered as collateral for the loan. As such the lender has to look at the worst case scenario, where you the borrower for some reason does not make the loan repayments and they have to sell the property quickly to make back the money lent.
Of course, many of these factors should apply to the criteria that you use when choosing where to buy and what type of security you are looking to invest in. Lenders look for risk minimisation, and to a reasonable degree so should you. When you are assessing a potential area or security you generally look at the potential opportunities for the area, and even the property, you take into account the risk (as an example if you were to look in QLD you would assess the risk of flooding) and you would look at the sustainability of the property.
Sustainability is a big factor when you are deciding on your investment strategy, will the local industry be maintainable, are there multiple possible jobs for the population or are they all dependant on one contributing factor such as a mine or plant and if that closes will everything else follow. These, in turn, dictate whether you are approaching the investment as a buy and sell or a buy and hold strategy.
Once you have decided on a strategy you need to find the lenders that support the fact that you are taking and will support it. This will stop you wasting your time applying for a loan only to find out that the lender does not like the post code and will not lend you the required amount or places some other deal stopping criteria on you.
If you are looking at purchasing on a boom cycle you will need to take into account a few points, in particular, the first and most obvious is where in the cycle is it? Purchasing near the bottom is, of course, the ideal however it is not unheard of for people to neglect this and get caught up in the storm buy at the top of the market and lose when the boom passes and property prices drop.
The other big consideration when buying in an artificial boom is high rentals, for example, if you are purchasing in a town with a new mine going in (yes I am picking on those mining towns even though they are definitely on the downward cycle at the moment) they would often see very high rental returns as the mining companies would subsidise rentals often in response to remote areas and as an enticement for staff. While these are fantastic they should not be relied on as an income source bearing in mind that they will often taper off once the mine is established. Many lenders will in fact only consider 60% of the rental income when they assess the serviceability so it is best to make sure that the debt does not require the high rental return for you to be able to make the repayments.
The last major lending consideration that you should keep in mind when you are planning to invest outside a major city centre is how will the property value? While in the city you can usually be fairly comfortable with the valuer agreeing to the sales price, this is not necessarily so once you leave the city limits. They will be looking at many of the same points discussed above. How will the property resell if required urgently? Has the price been artificially inflated due to a short term boom and is it reasonably sustainable?
There are several things that you can do to assist in this process, look for recent sales in the area, have a look at the area historically as well as projected growth. If there are other mitigating factors such as a strong local infrastructure and more than one industrial impact feature to ensure local stability.
If you are looking to take advantage of a boom area these will be slightly different but what they are really looking to offer the lender the comfort that the collateral that they are accepting is reasonably secure if the worst case happens.
Investing is always about doing the research and being comfortable with your chosen strategy and your exit plan. Investing in rural areas is generally about cash flow, not high capital growth except in those boom circumstances, so you want to make sure the factors are all in place to make sure you can have a tenant that is in a strong position to pay the rent.
Whether you are planning your next investment property in a capital city, or out we wish you happy investing!