Right! This is it. Time to buy an investment property. I'm really going to do it. I'll just get the quarterly sales figures for these 30 suburbs. Better make that 50 suburbs. Hang on, there are some hot spots up north. I'll check those out as well. Mustn't forget the yield figures, vacancy rates, city-wide infrastructure reports, planning codes, crime stats... This is going to take a while; I'd better get a cup of tea.
Six months pass, 12 months pass, investment opportunities flit by and you're still no closer to making a decision. The experts agree: you've got analysis paralysis.
"It's when people make the mistake of thinking that they can do their research wholly and solely sitting behind a computer, strapped into their ergonomic chair, without physically going out into the property market and observing what actually goes on," says Monique Wakelin, head of research, analysis and communications at Wakelin Property Advisory. "There is a place for looking at median values and looking at trends and looking at the way different precincts evolve over time, but that can't happen to the exclusion of actually pounding the pavement on a regular basis."
Rob Williams, who amassed a $2m, seven-property portfolio in under two years, says, "I think a lot of people go out of their way to look for too much information and get too many facts and figures. Perhaps they're trying to avoid making a decision or they're trying to look for more validation. Either way, it tends to result in that analysis paralysis and they tend not to do anything. That happens to a lot of people."
Williams was runner-up in last year's Your Investment Property Investor of the Year awards. He says there is no substitute for actually going to the location of a property yourself. "You can crunch all your numbers and get a pretty good idea but eventually you have to get on the ground and have a look," he says. "Does the local school look run down? What are the local facilities like? It's all very well to say there are restaurants and cafes around, but are they thriving or are they about to go under?"
Helen Collier-Kogtevs, director of Real Wealth Australia, acknowledges that highly experienced investors might get away with buying sight unseen, but for most of us, that would be very unwise. "You must always, always, always go and have a look at the property you're looking to buy," she says. "Drive around the area, have a coffee, talk to the locals."
First things first
Before you jump onto a real estate website and start typing in suburbs at random, stop and think. What is it, exactly, you want to achieve? Identifying what you want to achieve helps keep you focused. A budget helps you work out how much you can really afford to spend each week out of your income to put towards investing.
Your goal could be really simple: "I want to own two investment properties by the end of next year." It could be far-reaching: "I want to be financially independent by the time I'm 50." Whatever it is, once that objective is clear in your mind, you can start filling in the steps towards achieving it.
Put away the scattergun
Now that you've set your goal it's time to narrow the field.
"I focus on a particular geographical region," says Williams. "I don't want to run around, having to learn a whole lot of new stuff about different suburbs. I don't chase hot spots. I just follow the pattern in particular areas." Williams focuses on suburbs in the east and northeast of Adelaide no more than 7km from the CBD. "If I was looking in Melbourne or Sydney, I'd have to adjust that boundary," he notes.
Between 2-12km from the CBD is where Wakelin focuses her investment clients. "That's where the underlying demand is at its strongest and most consistent," she says. Wakelin vehemently rejects the whole notion of a 'hot spot' - a suburb in which there has been a sudden spike in median prices over the last 3-12 months. The problem, she claims, is that impressive as the short-term stats may look, the underlying investment fundamentals of these areas are often weak.
Suburbs in the capital city outer rings are particularly dangerous for investors, Wakelin says, due to the fact that occasional spikes in capital growth are largely driven by a single type of purchaser: the first homebuyer. "You've got to be investing in an area where the demand for both rental and resale comes from a very broad spectrum of potential buyers and renters," she advises. "It's got to be singles, couples, families, retirees, empty nesters. There has to be a broad cross-section of demand. When you're looking in these outer-lying areas, it's primarily first homebuyers. It's too narrow a profile of buyer."
Also be wary of developments in new suburbs, where median price rises are coming off a very low base. "The [growth] there ... is being driven by developer prices, which is not necessarily underlying value," Wakelin says. "There's a big premium associated with those that are not reflected in resale." Depreciation of the non-land component of your property will wipe out any gains in the short to medium term.
Williams warns against areas where prices are boosted by 'single factors', such as a new factory or train line extension. "You might have a little bit of a boom for a while, but as soon as the Holden factory starts laying off workers, it can go the other way quite quickly," he says. "The areas I invest in have shown very consistent, steady growth over a very long period."
Two of the most important features a suburb must have, according to Williams, are access to good public transport and proximity to good schools. "Even though [public transport] has always been of some importance, I think when we start to feel more pressure on fuel prices, that will become something that people will look at a little more," he says.
"Schools are a big-ticket item," agrees Collier-Kogtevs. "People underestimate that. You can only send your kids to those schools if you live in the area, and quite often that can help increase values."
Collier-Kogtevs' preferred investment targets are "blue-chip suburbs within a capital city", but she is not entirely averse to the idea of investing in outlying areas. In fact, yields can be quite impressive in some of these localities. "Outer suburbs are fine as long as there's a rental population there," she says. "We usually like to stay within the average - what people can afford to rent and what people can afford to buy. This is part of our risk-mitigation strategy. If I need to sell that property in a hurry, I've got the majority of the market out there able to afford what I'm trying to sell."
Getting to know you
Statistics, while somewhat valuable, can never replace actual personal experience. "I like the idea of doing my own research and conducting my own observations over a period of time," says Williams. "You have to start somewhere, but over time you build up your own little knowledge base."
It didn't take Williams long to trust his instincts when it came to determining the suitability of an area. "I can look at something and decide whether or not its good value," he says. "I know the surrounding areas and I know what's happened there over time. I've also got a pretty good idea of what the vacancy rate is just by talking to local agents."
The vacancy rate, a function of rental supply and demand in any given area, will fluctuate constantly. However, if you choose your suburb wisely, you won't have to worry about your property sitting vacant. Wakelin says that working out whether the balance of supply and demand is in your favour is just common sense because the main drivers are unchangeable.
"We know that they're not suddenly going to alter the town planning policy in, [for example], Pyrmont," she says, naming an inner-city suburb of Sydney. "It's not going to suddenly develop legs and walk another 40km away from the city. It is what it is. It's full of period-style housing. That in itself is scarce. It's close to the city - in certain parts you've got lovely views of the harbour and the bridge. The things that drive underlying demand and make a property scarce are the characteristics associated with the location and the style of architecture and the level of amenity and infrastructure that sits around. Those are the things that will not change."
Collier-Kogtevs suggests immersing yourself in open-for-inspections and auctions in your chosen suburb. This will allow you to identify over-valued and under-valued properties and give you an indication of when you should pounce. "Look at everything that comes onto the market that meets your criteria," she says. "You'll become very quickly aware that, say, an unrenovated three [bedroom], two [bathroom] sells for this price point and renovated sells for that price point. Then, narrowing down a couple of properties to buy will be far easier."
During the boom years of 2002-03 in Sydney (and a little later in Perth), real estate speculators flooded the market. Acting like stock market day traders, many would 'flip' their investments for short-term profit. The roaring capital growth looked unstoppable. Then came the correction. Speculators were burnt, in some cases to the tune of hundreds of thousands of dollars. A new era of caution has emerged.
This caution, however, can lead to an over-reliance on crunching numbers. There is a residual impression that property investment can be treated exactly the same as share investment. Nothing could be further from the truth. "Investing in the stock market is such a different animal," says Wakelin. "It is very numbers-driven and it's very theoretical. People who want to get into the analytical side of [property investment] have to balance up the physical side and the individualised nature of this asset class. You can have a block of apartments and every single apartment is slightly different, even though they're in the same building. Whereas you can look at Rio Tinto shares and every single share is the same as every other share. We're not dealing with the same kind of investment."
Individuality is in fact one of Williams' main criteria when looking for an investment property. He calls it the "edge" - that little something that sets a property apart from the pack. Unique attributes could include larger-than-usual rooms, an unusual but well-thought-out floorplan, a large private yard or an under-main-roof garage with access to the property.
Conversely, there are certain undesirable attributes that should make the wise investor walk away. Number one - location on a main road. "This is something you can never change," says Wakelin. "You can change the level of renovation of a property, but you can't change where it's located. Look at what you can't change and say, 'Does this fit the investment criteria? Is it a good location?' "
Properties requiring major reconstruction are a no-no for Collier-Kogtevs. "I don't mind a cosmetic renovation - lick of paint, new curtains, new carpet - but when it comes to structural - new roof, new stumping, rewiring, replumbing - to me that is a money pit," she says. "A prospective buyer would never see the value in that. They'd never see that there's $15,000 sitting on the roof. Whereas if you spent that on a renovation and you put in a new kitchen and you gave it a coat of point, people can see, feel and touch that."
Take that final step
Congratulations. You've found the perfect property. It's within your budget, it's in a good location, it's unique. What are you waiting for? Make an offer!
Deciding whether or not to start with a 'low-ball' figure will depend on the level of activity in your local market. "Our market [east Adelaide] is very buoyant and the people making the low-ball offers are the ones walking away with nothing," says Williams. "In other markets, low offers are the way to go, especially if something's been sitting around for quite a while. You have to rely on your own observations."
"I always low-ball," says Collier-Kogtevs. "At least find out where the bottom is, because if you offer $10,000 less than the asking price and they come back straightaway and say: 'Yes, sold,' then you know you could have gone lower. You're better off being obscene and asking for an $80,000 discount. They'll baulk at it, but my standard line to any real estate agent is: 'It's not where we start that matters, it's where we end up.' " (Investors may also benefit from the large range of online home loan calculator tools available online)
In the final analysis, if the price isn't right, you must always be prepared to walk away. You're now confident in your knowledge of the area and you know exactly what you're looking for. Keep at it. The perfect opportunity is just around the corner.