Finding 'the one'
Record-low interest rates and record-high clearance rates are making the property market more attractive for new and existing investors.
Australia, however, is an enormous country and finding the right suburb can seem like a huge task.
Luckily, there are a few steps you can take to make the process a little easier.
Before the search
A large number of failed or stagnated property investments can be attributed to insufficient research and inadequate education.
While reading books may help, Destiny Financial’s Margaret Lomas suggests would-be investors attend information nights and education sessions.
“We find that everything improves once they’ve done that,” she says. “The speed with which they can actually carry out the work improves, and it puts them in touch with other investors so they can share resources.”
Becoming a smart investor isn’t just about picking the property that will give you double-digit yields or explosive growth in a matter of months.
According to Cam McLellan, CEO of Open Wealth Creation, smart investing is about knowing what not to buy.
“The way to explain it is to imagine when you were a kid and you had a bag of lollies. If you wanted just one type of lolly out of that bag of 100 lollies, you would stick your hand in and riffle around trying to find it – it takes a long time and it’s really frustrating trying to pick out that one,” he explains.
“Then you learn that if you spread those lollies out on a table and you wipe out all the ones you don’t like, you’re left with only the good ones.
“It’s exactly the same when you’re picking property. If you know how to wipe out all the bad ones, you’re only left with solid-performing assets.”
It can take as little as half an hour each night to research your potential investment property. You should be reading up on strategies, areas and assets, as well as taking time to attend investor education sessions.
Ms Lomas believes setting out a goal before each session – such as discovering if Melbourne or Brisbane is a better option at this point in the property cycle – should help you stay on track.
Tenants don’t rent backyards, they don’t rent media rooms; they rent bedrooms. If you have the choice between two properties of similar price, and one has an extra bedroom, you can really maximise your rental returns and it will maximise your resale price.
Getting started
A lot of investors are working ‘upside down’, according to RESULTS Mentoring’s Brendan Kelly.
Many people start by looking at properties on sale in an area they’re comfortable with, find one they like, and then start searching for the indicators of a good investment.
Mr Kelly says you need to be doing it the other way round.
“The idea for finding the property best suited to your needs is to start from the bigger picture of reasons and outcomes, and then drill down to the streets where you’ll find your ideal property – not the other way around,” he says.
Other people decide on a price they want or a specific property type before they even check median values and property demand.
With that in mind, it becomes obvious you need to start big and then narrow it down in order to hone in on your ideal investment property.
So where do you start? When you’re looking at capital cities, Mr McLellan says you should contrast population growth with an area’s current housing supply.
“Usually 1.2 per cent population forecast is minimally what I look for in a capital city,” he suggests.
“Major developers, medium- to high-rise apartment developers and large-scale subdividers will also be looking for this – but usually the developers take two to three years to take developments to market, so we can hopefully beat them to the punch.
“The other thing is: Is the forecast of population growth up? Because if you look at supply and demand, population growth is demand and the supply is the stock being dumped onto the market.”
Zeroing in
With a macro overview, you should be able to establish which state, and even which city, would be best suited to your investment needs.
But after this, things become a bit tricky.
Australia only has a handful of capital cities, but we have no shortage of Local Government Areas (LGAs) and suburbs. Once you begin drilling down to a suburb level, you could be faced with hundreds of alternatives.
While the list can appear overwhelming, there are ways to select your suburb.
Research houses such as RP Data and SQM Research regularly publish lists of the top-performing suburbs. Unfortunately, in many cases, these suburbs have already experienced price growth. However, you may be able to latch on to a neighbouring suburb that could be next in line for growth.
Mr Kelly uses a method that allows you to find a suburb near a top performer, which is due for growth.
“In order to find the appropriate suburb, we draw a spiral out from where we’re looking and simply write down all the suburbs we come across in order on our spiral,” Mr Kelly explains.
“Once you’ve listed all the suburbs within a 30-minute radius, go and look up the median price for each.”
Once you have your list of suburbs and corresponding medians, simply circle all the medians from top to bottom that are in your price range, and are noticeably lower than the suburb experiencing the growth.
“If we search for information in longer-term history about the patterns of price movements between neighbouring suburbs, there’s every chance the pattern will continue to repeat itself,” says Mr Kelly.
You then need to pick the best one. To make sure the area will make a safe investment, Ms Lomas believes the next step is to visit each council website.
“The council website is a mine of information. They’ll have things like an economic forecast report that you can download, they’ll have their own stats so you don’t have to go searching through all of the ABS stats, employment figures, vacancy rates, how many people are renting, how many people are owners – and you can get all of that just from the website,” she says.
Alarm bells should ring if an area has excessive building approvals or too many scheduled land releases.
“In that case, there’s too much supply coming on. This means there is no pressure on prices – so you can cross those areas off the list,” Ms Lomas says.
The final step in selecting the suburb is to find what property type is most valued in the region.
“If a suburb has mostly families with a couple of kids, you’re not going to be buying a unit because then you’re going to have the least sought-after property in the area. If it’s young versatile couples, then you’re not going to be buying a big house because they’re going to be wanting to live in units,” says Ms Lomas.
Using all these indicators, you should be able to rank each suburb on the investment opportunities they offer you.
Final suburb selection
Starting with a map of one of the largest countries in the world, you have now whittled down your search area.
But before you pat yourself on the back, it’s time for one of the toughest parts of investing: actual asset selection. Two houses on the same street that appear similar may yield entirely different results.
How do investors pick ‘The One’?
Mr Kelly believes it is, once again, time to refine your search parameters.
“Study maps to determine geographical boundaries for various pockets within the suburb – which pockets are harder to get to? Which are close to public amenities and transport? Where is the community housing?” he says.
Look at what’s sold recently and call the local real estate agents who listed them. Mr Kelly advises investors to ask them what they sold for and if they have anything similar on offer at the moment.
“Get to know every property on the market. Get to know which streets are the best to be in and where people would not like to live. Get to know the rental market and what you can expect to receive as rent for your proposed purchase,” Mr Kelly suggests.
Doing a final sweep of the local amenities is also worthwhile: train stations, bus routes, schools, local shopping strips within three kilometres and major shopping centres within 10 kilometres.
Mr McLellan believes this step once again comes down to eliminating poor choices.
“Tenants don’t rent backyards, they don’t rent media rooms; they rent bedrooms. If you have the choice between two properties of similar price, and one has an extra bedroom, you can really maximise your rental returns and it will maximise your resale price,” he says.
He also warns investors about the dangers of getting caught up in superfluous ‘extras’, such as stone bench tops.
“If in an area nine houses out of 10 have laminated bench tops and the agent is asking for a premium price because of a stone bench top, you’re not going to get better value, so why do it?
“I don’t care if my tenants are chopping an onion up on my laminated bench tops … The biggest mistake people make is buying too big,” he says.
You also need to be constantly on the lookout for a property that is undervalued in order to generate instant equity.
According to Mr Kelly, once you know the area like the back of your hand, sales like these will stick out.
By using these tips and tactics, you should be able to eliminate many of the mistakes your first-time counterparts often fall victim to. By doing your due diligence you can remove yourself from the stereotyped ‘mum and dad investors’ label and set yourself up to become an experienced and seasoned investor.
Local or national
First-time investors generally prefer to invest close to home. It allows them to physically inspect the property they are buying, and they have a sense of control with their choice.
Your local area, however, is unlikely to be the best choice for investment in your state, or even your region.
Depending on your investment strategy, you should probably be looking on a much larger scale than your backyard.
Ms Lomas warns against inspecting properties, especially ones in your area, as you may not be looking for the right indicators.
“If you inspect the property, no matter how hard you try, you will always form an emotional attachment. It could be positive or negative, but there will be an emotional response that will affect your decision,” she says.
“There have been times when I have seen a property after I purchased it and thought ‘No way would I have bought this if I’d seen it’, but they turned out to be smart investments nonetheless.”
But if you’re going down the ‘buy, renovate and sell’ road, Mr Kelly suggests looking for property a little closer to home.
“You want to be within about half an hour’s drive from the property,” he suggests, “just in case the plumber can’t get in and you need to swing by.”