Here’s what a game of Monopoly taught this veteran property investor

I recently did something I haven’t done for a long, long time.

I played a game of Monopoly.

And yes, I won.

But I played it with my grandchildren, so I had an unfair advantage.

Now the game reminded me of a very important lesson all property investors must understand – and this is that not all real estate is equal.

You see…everyone wanted to buy Mayfair the most expensive street on the board, but no one really wanted the cheap locations at the other end of the board, the names of which I don’t even remember.

Then there are other locations on the monopoly board, some of which were more desirable than others.

And it’s the same in real life…not all real estate locations are equal and just like there are different precincts on the Monopoly board, there are basically 4 types of locations where you could buy properties in the real world.

And as you’ll see a lot has to do with the demographics of those who want to and can afford to live in these suburbs.

Discretionary Locations

These are the most expensive locations in our capital cities – the “established money” locations where most of the residents have lived for a long time and where many residents have paid off their home loans years ago.

In general, these locations are the established inner-ring suburbs of our capital cities or suburbs close to water.

Think of Toorak, Brighton or Kew in Victoria, Teneriffe or New Farm in Brisbane, and Darling Point or Bellevue Hill in Sydney

Over the long term this sector of the housing market outperforms the other segments, in part because of its scarcity, but in particular because, as we know, the rich are getting richer than the average Australian and they can afford to and are prepared to, pay a premium to live in these prime locations.

Interestingly over the property cycle values in these suburbs are often more volatile.

During property booms and periods of economic growth such as we are now experiencing, wealthy Australians have the financial capacity to indulge their emotional wants and buy the most expensive properties they can.

Then during the inevitable economic downturns activity in these locations tends to quieten down.

However, over the long term, this segment of the market outperforms the other sectors.

Of course, not everyone can afford to buy at this end of the market, so strategic investors often look to invest in … 

Aspirational Locations

These are the upper-middle-class areas and gentrifying locations of our big cities.

Suburbs like Bentleigh, Elwood in Melbourne; Paddington, Mosman, Randwick or Newton in Sydney and Camp Hill or Grange in Brisbane.

These are the suburbs where many affluent millennials are aspiring to move as they enter the family formation stage of their lives.

When this wealthier demographic moves into a suburb they tend to push up property values.

As you wander through these suburbs you’ll see a changing neighbourhood with new developments and infrastructure improving the quality of services for the residents as well as driving economic and jobs growth.

These developments also create a ripple effect producing economic, social and cultural change.

Then there are…

Affordable Locations

This is where most homeowners and many investors look because that’s where they can afford to buy.

However, sometimes investors buy in these suburbs because they are “advised” to buy at the cheaper end of the market.

There is no doubt some affordable areas make good investment locations, especially those that benefit from the ripple effect from adjoining aspirational suburbs and eventually become aspirational suburbs themselves.

On the other hand, most locations at the affordable end of the property market underperform with regards to capital growth and rental growth because many of the owners are young families who have stretched themselves to their financial limits and are often only a week or two weeks away from broke.

Similarly, the tenants who rent in these locations live there because that’s all they can afford and are unlikely to be able to pay you increasing rents over time since they are also only one or two weeks away from being broke.

As an investor I would steer clear of these affordable locations – most of these will never gentrify in your lifetime and they will underperform with regards to rental growth and capital growth.

Often owning properties in these locations will be more trouble than they’re worth.

Last Choice Locations

In every city, there are suburbs where people live because they really have no choice.

No one wakes up in the morning wanting to live in these suburbs, but social circumstances force them to.

Of course, investors should steer clear of these locations.

So just like owning the right locations on the Monopoly board, owning an investment property in the right location will do 80% of the heavy lifting of your property’s returns.

But there’s more…

Just like not all properties locations are the same, not all properties within each location of the same.

Even in the best suburbs, there are some properties I would avoid – they just don’t make good investments and others I would be keen to have in my portfolio.

1. A-grade homes and “investment grade” properties are the type of assets you want to own, and the type of properties, where great tenants want to live, not because they need to, but because they want to and are prepared to pay extra to live there.
   Think of family-friendly apartments in the great neighbourhoods of Bondi in Sydney or Elwood or Fitzroy in Melbourne.
2. B-grade properties still have a lot going for them, and during hot property markets like we are currently experiencing they still perform well, but their second location within their suburb or the less than perfect attributes of these properties means they will slump more in downtimes when buyers and tenants are more choosey.
3. C-grade properties – these are to be avoided unless they’re in a great neighbourhood and your intention is to demolish the property and replace it with something more appropriate for the location.

The bottom line

Just like in Monopoly, not all real estate is equal.

I know it’s often said that a “rising tide lifts all ships”, but in real estate that’s not really true.

A-grade homes and investment-grade properties in discretionary and aspirational locations are currently outperforming other types of property and are likely to continue to do so as affordability bites and affects the lower end of the market as prices keep rising.

So be careful … don’t get stuck with an underperforming property in the wrong segment of the housing market when this property cycle eventually ends;  because if history repeats itself, and it most likely will, you could end up with a dud property that you will regret owning and have difficulty selling if you need to.

NOW READ: 8 money and investing lessons you can learn from Monopoly