Four step research formula for finding the best property

By
20/03/2014

Property research can be as extensive as you want it to be, but to avoid information overload it’s important to narrow in on the four most important aspects of property research, writes Jeremy Sheppard

I have to admit that I can’t be bothered with exhaustive property research. I’ve written a book on the topic, but I don’t follow all the procedures to the letter. One of the reasons is that I consider myself ‘time poor’. I can’t afford to perform extra time-consuming steps doing things that may have a relatively minor influence on the end result. With this in mind, I’ll have a stab at simplifying my four-step research plan that makes the process more manageable.

Step 1
Identify potential suburb hotspots
The idea of step one is to get an initial shortlist of potential hotspots to compare against each other in step two. This must include some filtering so that only a manageable number of locations will be considered.

Hot tips are probably the easiest way to identify potential hotspots. Your Investment Property regularly features recommendations from industry experts, but a hot tip is only as good as the tipper, their experience and depth of research.

Note any locations that strike a chord with you. Jot down a few bullet points for each market on why you think it may have growth potential. These will probably be points made by the tipper, as well as some of your own observations.

I use the DSR (Demand to Supply Ratio) Score to get my shortlist. There is a list of top-scoring markets in Australia in the data section at the back of this magazine. I start with the top 50 or so markets, as sorted by DSR Score.If you get your shortlist another way, at least further refine it by your circumstances at the time. If your loan serviceability needs improvement, ignore markets where the rental yield is not attractive enough, for example.Also, weed out markets that are too expensive for your budget or too far away for you to feel comfortable investing in them.

Financing criteria
One of the first checks you should do is to determine if you can arrange finance to buy property in the area of interest. Some lenders restrict loans based on the type of property and the postcode it’s in. Ask your mortgage broker if there would be any problem obtaining finance to buy in any of the locations on your shortlist.

Next, check key statistics. Often there are anomalies or more up-to-date figures. Pay attention to the:

  • Median price (from as many different data providers as possible)
  • Number of days properties spend ‘for sale’ before selling
  • Discount between the original asking price and the eventual sale price (on average)
  • Vacancy rate
  • Gross rental yield


Have a quick look at some of the properties for sale and rent in the market. See if these properties match your expectations based on what you know from the shortlisting process. If there was a reason for a hotspot being recommended, you should Google that market and the original reason quoted to see if this can be quickly confirmed. There may be a more recent announcement on the progress of an infrastructure project, for example.

Step 2
Compare potential hotspots
The idea of step two is to pick the best hotspot from a list of potential candidates. The process involves eliminating candidates that don’t immediately appear to be as hot as first thought. More in-depth research is required on the remainder. 

Prices rise if demand outweighs supply, so your focus should be on getting information on current and future drivers of demand and supply. Many investors (and developers) fail auto adequately examine the supply side of the equation. Many are blinded by the drivers of demand and ignore the drivers of supply. A market with few demand drivers but a chronic supply shortage could experience better long-term growth than a market with strong demand drivers but only moderate supply. This is because there is less chance of a bubble forming from purely sentiment-based buying or from too much developer activity.

Developers follow demand driver announcements in the media. They also don’t like developing in locations where the council has heavy development restrictions in place. So chronic undersupply can go unnoticed or unrectified for years.

Gauging supply drivers
Go to the local council website for the areas of interest in your shortlist. Find the page that lists development applications. Try to discern between applications lodged and applications approved. Gauge the size of each development by the number and type of dwellings. The point is to know how many properties are about to come on to the market. You want to measure supply in the not-too-distant future. 

Note that some local government areas (LGAs) are large and may have what looks like a large number of applications, so find out the LGA’s population and contrast it against the amount of building activity. Do this a dozen times and you’ll get a decent idea of which LGAs have a large amount of development activity and are quiet relative to their population base.Remember that supply is the enemy of price rises. Generally, you don’t want heavy developer activity. On the other hand, zero demand will make low supply pointless.

Gauging demand drivers
There are loads of potential demand drivers. Two of the big drivers are:

  • Public spending by the local council, state or federal governments, usually on infrastructure projects. Ideal projects include the involvement of the federal government, like the extension of a train line. Low-impact ones are usually carried out by local council and may only involve the beautification of nature strips.
  • Private spending, such as investment by big companies, can impact on employment opportunities. Check where banks, supermarkets, restaurant chains and hardware stores are opening new outlets. New private hospitals and schools also drive demand.


Keep in mind that recent changes are more influential than existing qualities. You might find a suburb with excellent public transport, great schools and ideal shopping, but if those qualities have been part of the suburb for a decade and remain unchanged, they will likely be already priced into the market. Recent changes that make markets more attractive take time to reflect in prices. So recent positive changes are always to be valued above existing qualities. 

Contact a few of the local real estate agents and ask them their opinion about the current nature of the market and what they see happening in the not-too-distant future. Be sure to ask them for their reasons. Browse local newspapers and Google as much as you can think of that is specific to the area. This is in no way a comprehensive list of things to research. I’m just targeting the easier and more important ones.Once you have accumulated as many notes on the drivers of demand and the drivers of supply for each of your top picks, weigh them up and choose the best one.

Step 3
Determine the best parts of a suburb
Step three entails finding those parts of your chosen suburb that present the best opportunity for capital appreciation in the next one to four years. Start by asking local real estate agents if there are any ‘no-go’ zones or trouble spots. Check if there are any blocks that RESEARCHare pure Housing Commission or have a high density of Housing Commission homes. Ask the agents where the preferred locations are; perhaps where they would buy right now if they had the cash.

Look at everything you can on an up-to-date map of the suburb. Google Maps is invaluable here. Look at vacant land, parks, trees, the streetscape and proximity to amenities. Switch between satellite and map views. Check the street view, where possible. Nothing beats a drive around, but pondering over a map for half an hour will highlight more precisely what you want to see first-hand.

The key to the use of maps is finding locations that are within walking distance of the most important amenities but far enough from undesirable areas. Tenants will always want to be close to:

  • Public transport
  • Schools, especially primary schools, since parents often walk younger children to school
  • Shops


Note that being too close to some of these amenities can actually be a deterrent for many potential tenants. 

A balance needs to be struck, considering their need for peace and privacy.
Some undesirables might include:

  • Heavy intersections, main roads or thoroughfares
  • Industrial areas
  • Skate parks? poorly lit streets
  • Small laneways
  • Vacant blocks
  • Service stations

Step 4
Find the best properties
Step four is finding the best properties within the areas or streets determined from step three. You need to eventually narrow down the list to about five to 10 of the best opportunities, assuming you’re buying just one property. You will make offers on more properties than you will buy because good deals are often found only after some negotiating. Having options gives you the power to walk away from a stubborn seller.

Type of property
Ask the local real estate agents what kind of property is most sought after by buyers and renters. Is it a house, apartment, townhouse or something else? How many bedrooms? What standard of finish?

In neighbourhoods with many character homes, you may find an opportunity with a property that stands out from the crowd. If, on the other hand, it is the character of homes that appeals to buyers and tenants in the area, then that needs to be considered too. Again, ask the local real estate agents.

Visiting the suburb
When you eventually get around to visiting the suburb, note the things that online research can’t uncover, such as:

  • Pedestrian/shopper volume and location
  • Traffic volume and flow
  • Terrain/views
  • Any smells (sewage/sea/industry)

Inspecting properties
Although online photos of the dwelling may give an adequate idea of the property, neighbouring houses are never included. You should examine these to ensure you’re not buying the best house in the worst street. Ideally, you want every neighbouring property to look better than the one you’re considering. Their values will lift your target property’s value and help to avoid over capitalisation if you plan to renovate.

Take note of the orientation of the building. Remember that in Tasmania and other cooler climates good exposure to the sun is important, whereas in Darwin, for example, protection from the sun is crucial.

Fair value
Use past sales reports to get a good idea of fair value, and start by offering less. As vendors continue to knock you back, you’ll eventually get an idea of what they are willing to accept.

Jerry Sheppard is an active property investor and director of Redwerks. He is also the inventor of the DSR (Demand to Supply Ratio) Score, which measures the capital growth potential of markets based on their balance of property supply to demand. Visit DSRScore.com.au
 

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