Expert Advice with Brett Warren
Is assessing demographics an integral part of building your property portfolio?
If not you could be missing the key to building longer term wealth without significant risk.
Understanding demographics could and should be the final piece of the puzzle for you during the decision-making process.
It is certainly something we monitor at Metropole on a continual basis to ensure we get it right.
After all, we are looking for locations that can ride out a downturn and produce above average rates of return in the good times.
Here are my thoughts and what we look for;
Owner occupier percentage
I feel that this is usually the best place to start – at the top.
Homeowners are longer term thinkers, they generally wont panic and just sell their home in a crisis.
[adrotate group="85"]I know Michael Yardney always says that people would rather eat dogfood than sell their home.
In other words, they will do whatever it takes to keep a roof over their family’s head.
Investors are different.
They tend to be shorter term thinkers and are reactionary, with more emotion.
As a result, they are more inclined to sell up when times get tough, causing a great deal of downward pressure in the market.
A great example of that is mining towns – markets heavily affected both ways by emotion.
While there is no magic figure, naturally we would like to see more owner occupiers residing in that location than investors.
With that now established, lets drill down a little further.
You see not all owner occupiers are equal and we are looking for a certain type of Owner Occupier.
We are looking for Owner Occupiers in locations where they are not just reliant on one income stream.
They are not living pay cheque to pay cheque.
We look for Owner Occupiers with multiple streams of income, for example;
- Both occupants may be working
- They may receive bonuses and commissions from their work
- They may receive an income from property or shares or other investments
- They may have a side business
We regularly monitor and assess the Weekly Family Income of a certain locations and compare it to the average for that State.
Let’s take a closer look.
In a previous article, I argued this may be the most important piece of property data you may not be using.
As we are seeing in the current environment, people who lose their job or sole source of income during this period, unfortunately struggle and may be forced to sell.
Others can rely on other sources of income during this period and be able to ride it out without being forced to sell.
In these locations’, prices may soften but they will not drop drastically like the 30% -50% being predicted.
I must also stress, this is not a judge of people, but an analytical perspective on the data.
This can also be the key to lowering the risks inside your own portfolio.
And boy, it is more evident right now than it has ever been previously.
Areas that are heavily reliant on tourism, retail and manual work have virtually come to a stand still.
Leaving many employees out of work, with little to no income.
Those jobs that are based around professional services like IT, Financial and without doubt Health have thrived.
Many that have been affected have still been able to work from home and earn an income.
A point you have no doubt heard many times before, the vast majority of these jobs are within or very close to our CBD’s and Hospitals.
Why fight the big trends?
Understanding the demographics of a location you are about to invest in can be very important.
While we all endeavour to maximise our returns, significant risks can often be overlooked.
By getting a clearer picture of the trends and data for the location you may be able to achieve the best of both worlds.
Owner occupiers with higher incomes can and do pay more to buy and improve their properties.
This will lead to greater growth and returns for your portfolio.
Then in downturns, they will not sell and can afford to ride it out and in almost all cases, they will do whatever it takes to keep their family home.
So, prices will never drop sharply, and they tend to recover significantly quicker.
If you are building true wealth, you need a deeper level of understanding and perspective, as opposed to a news headline or tip from a family member.
Brett Warren is a director of Metropole Properties in Brisbane and uses his 18 plus years property investment experience and economics education to advise clients how to build their portfolios.
He is a regular commentator for Michael Yardney's Property Update.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.