Why you're better off buying an investment property that has owner-occupier appeal

The appeal of an investment property to potential tenants should be front of mind for any investor. After all, it’s the tenant who will pay the rent and, ideally, take good care of the property.

But arguably more important is its appeal to future buyers, even if the investor has a buy-and-hold strategy.

This is because demand from owner-occupiers, rather than investors or renters, is the key driver of capital growth in the long term.

Owner-occupiers dominate

Two-thirds of Australians live in a home they own, while the remainder rent, according to ABS data. Owner-occupier appeal is one of the core aspects to look for in an investment-grade property because these buyers represent the largest segment of the market, according to buyers’ agent and Empower Wealth partner Bryce Holdaway.

“Residential real estate is not dominated by investors, it’s actually dominated by people who have a basic survival need,” he said. “Seventy per cent of the market buy property for a roof over their head, 30 per cent buy it as an investment.”

If a property only appeals to investors, there may be less upward pressure on prices in the long term, according to financial planner and Wealthful founder Chris Bates.

“A good strategy comes down to understanding that property is actually about people,” he said. “It all comes down to who really wants to live in your property – not rent it, but buy it.”

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Owner-occupiers are more emotional in their property decisions than investors, who are primarily motivated by financial return.

They are more likely to pay a premium for a property that ticks all the boxes, while investors are more likely to walk away if the numbers don’t stack up.

Know your future buyer

Many investors base purchasing decisions on rental yield, as properties with high rental returns are more likely to be positively geared.

In general, smaller properties, such as studios or one-bedroom apartments, have higher yields than houses, and yields in regional areas are higher than in capitals.

Inexpensive high-yield properties can be tempting, but investors in it for the long haul should look beyond short-term return and consider the future desirability of their chosen property.

To maximise capital growth, smart investors should select properties that will appeal to affluent buyers, according to Mr Bates, as owner-occupiers who earn more can borrow more.

“You really want to buy a property that suits families, and couples who are on higher incomes,” Mr Bates explained.

A studio apartment has a narrow market of singles, couples and investors, and isn’t desirable for high-income earners.

Similarly, properties in regional areas appeal mostly to local owner-occupiers and investors and, without the diverse employment options found in the capitals, the pool of affluent buyers is limited.

On the other hand, a free-standing two or three-bedroom house 30 minutes from the CBD of a capital city would appeal to a larger number of more diverse buyers.

Provided the property has a good location near transport, schools, shopping and lifestyle amenities, the increased demand and the limited supply of this property type will mean its value will increase faster than less sought-after properties.

Mr Holdaway said an investment-grade property should be “in the bell curve” of median prices in an area, as this puts it in the price range for the widest market of buyers.

Properties priced too far above the median may have yields that are too low, increasing holding costs for investors.

Despite its higher price tag, lower yield and a potentially bigger shortfall between rental income and expenses, an investment-grade property is underpinned by broad demand, making it more likely to generate more wealth for the investor through strong, long-term price growth.

Growth unlocks opportunities

When it comes time to sell, investors with assets that appeal to owner-occupiers can expect better results.
Photo: VM Studio

As a property increases in value, so too does its potential rent. If rents rise while repayments remain stable, negatively geared properties can become positively geared over time, creating passive income.

Even if an investor has no plans to sell their property, its growth in value will increase equity, which can be withdrawn for future investments.

When it comes time to sell, investors who chose assets with owner-occupier appeal can expect the best result on auction day.