What is research and due diligence?
Everyone has an opinion on property investment - what works, what doesn't, how you'll succeed and why you'll fail - but without a hard and fast rule book, investors need to know what information to be looking for and what information sources to avoid.
Blogger: Andrew Crossley, Australian Property Advisory Group
Many investors are drawn towards innuendo, media hype, and listening to friends, family, and back yard experts. Everyone has an opinion. The real issue, which inadvertently leads to failure, lies in not undertaking proper research. Some people kid themselves into believing that just reading a glossy brochure about some ‘house and land’ package or ‘off the plan’ project is sufficient, and that the salesperson is possibly believable and trustworthy. I strongly beg to differ!
There is no real rulebook out there.
Here are some respectable and risk-reducing considerations that should make your job easier in finding an outperforming location, which reinforces why it is important to seek objective advice.
I believe advice is only objective if it serves the person being provided the advice. It should have nothing to do with any vested interests the advice provider has. It has nothing to do with the belief system, attitude, or religion, of the person who is providing the advice.
The advisor cannot be engaged by the vendor. Preferably, they should not directly communicate with the vendor. They should not have a contract contracting them to market-specific projects, or have targets or (key performance indicators) KPIs to achieve for anyone.
Objective advice should be based on facts and figures, and reliable information – unbiased information. This goes for information provided to the investor, and the information the investor is basing their own decision on, as well. Often property investors can fall into the trap of using their own emotion, beliefs, attitude, and experiences to base decisions on, such as where to buy and what to buy, and the inclusions in the property itself.
Every decision I make is based on what I have learned, discovered, or researched, and this will assist in calculating the potential of the location and property to make more money. What I personally prefer has no relevance compared to what the area suggests I need, in reference to the type of dwelling in the area that I should purchase. What the demographic wants, and what I should be spending for the type of property in the given type of area, is what’s important.
Components of Research
Let’s start with the reality of the situation with any property. There is no guarantee.
There is no magic wand. Some sell answers to what they call ‘secrets’. There are no secrets. However, if you don’t do your research you are planning to fail. By researching you are, in effect, reducing your risk by eliminating some very obvious negatives that could be associated with an area. This serves to reduce your chances of failing, and therefore increase your chances of success.
‘If anyone presents themselves as a holder of “secrets” in real estate, run away. Don’t look back. Anyone promising to reveal secrets in the property business is, by definition, a spruiker.’
– T Ryder
Looking at supply and demand again, many marketing firms and spruikers (who have vested interests in specific locations, due to their vested interests in, and incentives attached to, specific projects) will tell you how good the population migration is to the area and, maybe, what the Government are planning to spend. They excite you with the fittings and fixtures included in the project, and this can lead to many investors immediately forgetting that every other apartment, in the building or house in the development, has the same or similar inclusions.
The major hole in their story is what the supply and demand is in the area. They tend to ignore this fundamental part of research, and conveniently misrepresent population migration. It is misrepresented, as it is not taken into context with supply and demand by almost all of these spruikers.
The location of the suburb is a good starting point. Its proximity, to some, is the driving force attracting people to the area. If people are not attracted to the area, why would the area increase in value? The fundamental figures start with supply and demand, like any commodity. If there is no demand, then it has little true value.
Some places have the benefits of a sea change; some have the benefits of the country.
The more important elements of the location are its infrastructure.
Some infrastructure is merely ‘being discussed’ by council, and other authorities, as to ‘whether it will be planned’. Then it may end up ‘being planned’, and move forward to being a ‘committed plan’. Once the infrastructure has actually commenced, you can be certain that it is in full swing and it will have a tangible end result. The best solution here is to select a location where there are several existing industries. Be careful if you’re acting on something that is only being discussed. It needs to be approved.
Mining towns may only have mining as an industry, and can help you make excellent money, but you can also lose a great deal – not just in capital growth potential, but through real growth decline. Rental property often declines significantly in a ‘one industry’ town. If the industry falters, the town could die. You need a location where people will stay if an industry dies.
The economy of the area and surrounds, including the amenities there already (and in the pipeline), are important to know. Properties in suburbs with train stations tend to grow more than suburbs without stations in metropolitan locations. Hospitals, schools, other transport, and shops are important too.
The demographics, particularly for guiding you in making a more informed decision about the ‘what’ that you should buy in the area, are very important for your budget, growth, rental, and any works needed on the property, and whether those renovations will improve the value. It also tells you the number of renters in an area. It is very handy to know if you can find out how many investors are buying in the same development you are looking at, and over what time frame the dwellings are being released.
In some areas, units are more popular and will have appeal to a greater percentage of the population. In other areas, duplexes or houses are better.
Vacancy rates (and not just the current rates, but how they are trending) will help you see if the area is becoming more popular, or losing people. A simple snap shot will not demonstrate this, as it only captures a moment in time. When you look at shares you would normally look at trends, so why not do the same with property? The methodology applies to the following points:
• Capital growth history
• Yields
• Days on the market
• Discounting and auction clearance rates
• Median house prices
• Population
• Supply and demand
Research at State level
Narrow down to the location, based on borrowing capacity and strategy, bearing in mind the basics of supply versus demand, in conjunction with population growth, and infrastructure that is supporting employment and employment growth. It must be a multi-industry suburb to avoid excessive risk. Check, also, whether the infrastructure growth is temporary. Will people leave once everything is built (i.e. trades people, construction workers, etc.?) Will vacancy rates increase after the construction of infrastructure is completed, particularly when developers moved in like moths to a flame and over-develop an area?
Check the position that state is in, in regards to the property cycle (property cycle refers to the period of time over which the price of a property changes by being influenced from demographic, economic and supply and demand changes in the area, each area may have it’s own cycle and be at different stages than any other area)and whether it is at the bottom, middle, or top of the cycle. It is always a good time to buy, but not everywhere, at any given time.
Oversupply, master-planned communities, and excess land can all hinder growth. Prime examples could be suburbs in growth corridors, as there could be better opportunities to be had further in towards the CBD, or even in locations the same distance from the CBD in some. In some of these large estates schools, hospitals, shopping centres, and a train station are all aiding the benefits of your potential property. Trains and access to transport are big factors in the investment being viable.
If you follow this process, you will dramatically enhance your ability to time the market better, take more advantage of out-performing potential, reduce the risk, and balance the effect on your lifestyle – and better your future! I have only covered some simple basics here again.
