Typically, you need a budget of circa $1.5 million to purchase an investment grade house (investment property) in Melbourne, less in Brisbane, and a lot more than $1.5 million in Sydney. Of course, not everyone can afford this budget, so I wanted to discuss how to buy the highest quality property possible within your budget. 

This blog will still be useful even if you do have a budget of $1.5+ million, as it will help you understand what “investment-grade” property means. 

What makes a property investable?

Regular readers of this blog will know that I always adopt an evidence-based approach when making investment decisions. An evidence-based approach typically means adopting a rule-based approach. That is, apply a set of objective rules to identify the asset/s that are most likely to generate the future investment returns that you desire. 

The rules-based approach for investing in residential property involves ensuring a property has three important attributes. Properties that have these three attributes are typically considered investment-grade. 

Attribute 1: A persistent imbalance between supply and demand 

‘Supply and demand’ is a basic economic concept that explains how many investments work. 

The goal with investing is to invest in assets that will generate good returns over very long periods of time. For example, an 8% p.a. return means your investment will be worth 10x in 30 years. Obviously, a 10x return will help you generate a huge amount of wealth. 

The most likely way to generate strong capital growth over very long periods of time is to invest in properties that are in finite supply and benefit from growing and excessive demand. When the number of buyers exceeds sellers, prices will rise. 

Finite supply means that there is no vacant land within close proximity, which is why well-established, blue-chip suburbs are typically great locations to invest in. A dwelling’s attributes can increase a property’s scarcity too. For example, no one is building art-deco properties anymore. Apartments blocks constructed in the 1960’s that only include 6 apartments are also very scarce – developers would probably build 20+ apartments on these blocks today.  

Excessive demand can be achieved by investing in property that the wealthiest 20% of Australians desire, as their incomes and wealth position (and future inheritances) will assist in pushing property prices perpetually higher, for the reasons that I have previously explained here. 

It is also very important that a property appeals to a variety of buyers such as families, professional couples, upgraders, downgrades, investors and so on. You must not invest in an asset that only appeals to one type of buyer. This will ensure demand remains consistently high.  

Attribute 2: Evidence of past growth  

There’s a common disclaimer used in financial services; past performance is not a reliable indicator of future performance. Whilst that might be true for some asset classes and investments, often past performance can be reliable indicator when analysing residential property. The reason for that is that the factors that have driven prices higher in the past tend to be static and factual, which means they will be responsible for driving future growth. 

Static means that the positive attributes that make a property desirable tend to remain unchanged for many decades. For example, a property’s proximity to (private) schools, arterial roads, shopping strips, entertainmen

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