Expert Advice with Michael Yardney. 28/03/2017
Unfortunately, the most research many property investors do involves finding a property they fall in love with and then clicking on a few websites to confirm the decision that they've already made.
On the other hand, sophisticated investors take a strategic approach to research to make their investment results consistent and reproducible – and this also stops emotion creeping in.
So how can an investor learn how to research like a pro?
Firstly, it's important to always start with macro factors (big picture) and then drill down to the micro (property) factors.
That's because your property’s location will do 80 per cent of the heavy lifting and then choosing the right property in that location will account for about 20 per cent of it’s performance.
When I changed my investment research criteria from looking at what happened in the past to forecasting what is likely to occur in the future, I improved the performance of my investment selections and those of my clients’ considerably.
Rather than doing the type of research most people do and looking at how a location has performed in the past, I look at the factors that will drive the locations performance in the future and these include:
• Demographics and population growth
• Economic and employment growth, which leads to wages growth and the ability to afford properties
• Infrastructure growth
• Supply and demand
I also look for multiple growth drivers because we have all recently seen the end result of those investors who chose areas with a single growth driver or single economy, such as the aftermath of the mining boom.
Similarly, I see people who say they're going to buy in areas where a big hospital is being built, but again this is only a single growth driver and, in my mind, isn't sufficient to make the area one that will outperform in the long-term.
The lesson I’m trying to get across is that there need to be multiple growth drivers to underpin your property’s long term performance. This means that if one or two of these falter for a while, there are other factors supporting your property’s performance.
And it’s all happening in our capital cities.
In the foreseeable future most of the growth drivers, particularly economic ones, will occur in our capital cities and over the next couple of years two thirds of Australia’s economic growth and population growth are likely to occur in Sydney and Melbourne.
However, just because you’ve found an area that's likely to grow well in the future, that doesn't mean that every property in that location will be an “investment grade” property.
For example, the property must appeal to the local demographics. For instance, an apartment is likely to make a good investment in an inner- or middle-ring suburbs, while a family home is more likely to be a good investment in the outer suburbs where an apartment would be out of place.
To ensure I always select properties that will outperform the general market, I follow two specific strategies.
My Top Down Approach
As explained, this starts with examining the macro factors affecting our property markets and drills down to the micro level.
1. I start by looking at the macro-economic environment – the big picture of how Australia’s economy is performing.
2. Then I look for the right state in which to invest – one that will outperform the Australian market averages because of its economic growth and population growth. Also, I only invest in the capital cities and not in regional areas, because that’s where the bulk of the jobs will be created and where most people are going to want to live in the future.
3. Then within that state, I look for the right suburb or group of suburbs – ones that has a long history of outperforming the averages.
You see…I’ve found that some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period.
And it’s all about demographics, as these suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals can afford to and will be prepared to pay a premium to live because they have higher disposable incomes.
In general, they’re the more affluent inner- and middle-ring suburbs of our big capital cities, so I check the census statistics to find suburbs where wages growth is above average.
4. Then I look for the right location within that suburb. Some livable streets will always outperform others and in those streets, some properties will always be more desirable than others and outperform as investments by increasing more in value.
5. Within that location I look for the right property, using my 5 Stranded Strategic Approach, which I will explain in a moment. And finally, I only buy at...
6. The right price, but I’m not suggesting a “cheap” property – there will always be cheap properties around in secondary locations. I mean the right property at a good price.
My 5 Stranded Strategic Approach.
Once I've found the right location the next phase of my research is to find the best property for me to buy using my 5 Stranded Strategic Approach, which involves the following steps:
1. I only buy a property that appeals to owner occupiers. Not that I plan to sell my property, but because owner-occupiers will buy similar properties pushing up local real estate values. This is particularly important in the current market when the percentage of investors in the market is likely to diminish.
2. I only buy a property below its intrinsic value – that’s why I avoid new and off-the-plan properties, which come at a premium price.
3. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. I also look for a property with a high land to asset ratio – where the land component (the part that increases in value) makes up a significant part of the property’s value.
4. I also look for a property with a twist – something unique, special, different or scarce about the property, and finally...
5. I only buy a property where I can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
While most investors read a book or two, do a little research and then buy one of the first properties they come across, strategic investors are much smarter than that.
They follow a system that is rooted in the real world and has stood the test of time in changing markets.
By following my 5 Stranded Strategic Approach, I minimise my risks and maximise my upside.
Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.
If one strand lets me down, I have two or three others supporting my property’s performance, to ensure my investment properties always outperform market averages.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.