Investing in real estate is recognised as one way of building sustainable wealth over the long term. It is a decision that may have significant repercussions if not well thought out. One of the considerations when making this decision is determining whether to invest locally, or interstate.
According to a survey conducted by LJ Hooker, only 14% of Australian investors have an investment property in a different state to where they live1. This alarming statistic poses the question; Are Australians analysing the key market fundamentals or just buying where they live?
The benefit of investing locally is you have first-hand knowledge of the area. Local residents know the demographic of the area, the good and bad streets, and the better schools. Also, they are able to inspect their investment allowing them to address any concerns before any major issue arise. In doing so, you are reducing multiple costs such as property management, travel costs and time.
However, having personal history with a suburb may lead to bias and can affect your ability to make a good financial decision. When deciding to invest, the most important thing to do is avoid this personal bias, however this appears to be difficult for Australians.
So why invest interstate?
Any seasoned investor will have a diverse and extensive property portfolio. Market conditions vary across the states; when prices are correcting in one market they may be improving in another. Owning properties in other states will strengthen your portfolio and minimize risk as you're benefiting from the different peaks in the property cycle.
Investing interstate also has potential cost savings. Each state has a certain land tax threshold before land tax is payable. Land tax is only charged for properties held in each state. If you reach the threshold in that state, you could invest in another.
On the down side, extensive research is required if opting to invest interstate. There are different laws, and it may cost time and money for you to go visit the property. These barriers can be easily mitigated by working with the right team.
There are many cities around Australia with diverse economies and strong population growth. It would be unwise to disregard these options simply because of their location. Nevertheless, when investing local or interstate, it is vital that you seek guidance from an appropriately qualified professional. Stay within your financial boundaries and invest with your head and not your heart.