Paying a "premium" for a property is essential

No one really wants to pay extra for a property purchase, right? However, there are circumstances where paying a premium makes good financial and investment sense.

While you should never let emotions drive your purchase decisions, investing a little more in a high-quality, investment-grade property located in an A-grade area can be worthwhile. These properties are known to provide solid returns and robust capital growth, making the extra expense a smart choice.

When it comes to working out what type of investment property you should consider paying a premium for, it’s helpful to break it down into categories and see how many this property checks off.

Here’s a breakdown of when and why paying a premium for property is a good idea, and how much you should put down.

1. Location

Around eighty per cent of your property’s capital growth performance will be due to buying in the right location and the balance by owning the right property, an “investment-grade” property that suits the fundamental demographic in that location.

A property in the right suburb, on a good street and away from a busy road would warrant paying a premium for, for example. Properties within a close distance of lifestyle amenities and transport are also valuable, as are those in gentrifying suburbs where this will become a reality in the near future.

2. Good land-to-asset ratio

I always look for property with a high land-to-asset ratio, but this does not necessarily mean a large plot of land…Well-located apartments have an attributable significant land component under them. Properties in the right location and with a good land-to-asset ratio would be worth paying a premium for.

3. Potential for capital growth

I like buying a property where I can manufacture capital growth through renovations or redevelopment rather than relying on the market to do the heavy lifting.

4. Potential strong resale value

Is the property likely to attract a premium when sold later?

If there’s a strong interest in the property type, for a particular location or if it has a particular style or attributes that will always be in demand, it can be worth paying extra initially, even if you have no intention of selling it, because similar properties that sell in the vicinity will push up the value of your property.

5. Layout/floor plan

If properties in the area are smaller, but you require more space, a premium may be warranted. For example, a four-bedroom terraced house, which is not common, can justify a higher cost. Likewise, properties with a seamless floor plan or one where all the bedrooms are located together in one area are generally more desirable and can justify a premium.

6. Scarcity

Properties with a twist, which have something unique, special, different, or scarce are generally in higher demand and therefore would make good investment sense, even at a slightly higher price.