The best property investors have already made all the mistakes and learnt all the lessons so you don't have to repeat them.
In my previous blog, I explained why the passive buy and hold strategy was flawed, and how smart active investors who continuously assessed the market and pounced on opportunities to reuse lazy equity, were winning the investment race.
Successful active investors also have four other strategies and attributes in common and you can learn a lot from them.
1. Invest in locations primed for growth
How do you find these amongst 15,000-plus suburbs?
Most investors foolishly choose where to invest on emotion. They fall back on investing in areas they know. They rely on biased advice from friends, family or property professionals and are swayed by media hype.
Smart investors know that finding the best locations is a stats game. They know capital growth is governed by supply and demand:
• If there are more properties for sale than the demand for them, prices will go down.
• If there is more demand than properties for sale, prices will go up.
There are various supply and demand indicators, available across numerous online sources. They include auction clearance rates, days on market, and stock on market percentage.
The struggle is knowing 'What' data is available and 'Where' to find it, and then being able to pool it all together to 'Process, Analyse and Rank' over 15,000 suburbs to cherry-pick the best.
Understandably, most investors find research overwhelming and fall back on emotion-based decision criteria.
But now there are smarter, easier ways to predict and choose growth locations. Top investors use stats-based tools to shortlist suburbs, and then do fundamental research and property searches in these areas before deciding where to invest.
2. Understand how to calculate ‘opportunity cost’
The location you choose has a huge bearing on how fast you build your investment portfolio.
You would rather buy a $400,000 investment property in an area that is likely to see 10 per cent per annum market growth ($40,000) rather than only five per cent ($20,000). The lower-performing suburb would represent a lost opportunity of $20,000.
Annoyingly, many markets spend most of their time in the 'flat' zone, achieving no growth for around 80 per cent of the property cycle. But is that a reason to sell in favour of an area experiencing more capital growth — say five per cent? It may not be — but it’s worth assessing.
It comes down to the numbers:
- The capital growth potential of your suburb versus the suburb you are considering = ‘opportunity cost’.
- And the real costs associated with selling your current investment and recycling your equity into your next investment = ‘recycling cost’.
Importantly, active investors leave emotion aside and focus on the objective numbers and facts when determining opportunity cost.
Of course, you never rely on the data alone, but it does help you quickly filter out 90 per cent of the property market and then tailor deeper research to your budget and strategy.
3. Get your ‘recycling cost’ calculations right
Consider the costs associated with selling your non-performing property and buying your next investment opportunity (recycling equity).
Selling costs include:
- Selling agent's commission
- Legal fees
- Loss in rental income
- Repairs and cosmetic touch-ups
- Capital gains tax
- Vacancy if tenanted
Buying costs include:
- Stamp duty
- Legal fees
- Lender's mortgage insurance
- Building and pest inspections
- Temporary loss in rental income
4. Know when to sell
If the opportunity cost outweighs recycling costs, then sell. That is, if you have correctly judged the state of your market and the opportunities elsewhere, and calculated your recycling costs correctly.
If your market has been dropping consistently over a year, you need to check the fundamentals. Example: has further development in the area increased supply and in turn decreased demand and therefore prices? Do the fundamentals back up what the stats are saying?
You should also look at the individual statistics and whether this threatens your strategy. Example: are gross rental yields (rental income to property value percentage) dropping? This may not be a bad thing — an increase in property prices, without an increase in rental growth will cause yields to drop. But an increase in gross rental yields may indicate that prices are falling.
Assessing what the market is going to do is part art, part science. Not everyone is a market expert with stacks of time, know-how and experience to pick the winning suburbs. Not even the property experts working full time in the industry get it completely right. By nature, we are all affected by emotion, hype and opinion and this is often our downfall when it comes to deciding where to invest. The investors who, where possible, stick with the hard, cold facts have an advantage … and there are now clever statistical research tools to help.
About the Blogger
Michael Fuller founded Hotspotcentral.com.au, creators of Boomapp.com.au, a free property research web app used by over 13,970+ property investors and industry professionals to confidently decide where and when to invest. Boomtown uses powerful algorithms and 'machine learning' to rate and rank over 15,000 suburbs based on how they compare against 8 respected property statistics pulled from numerous online sources including the property portals.
Hotspotcentral.com.au is the only property crowdfunding service in Australia using sophisticated algorithms to identify high-performing investments for their subscribers who wish to not only acquire brand new properties at 15-25% discount using 'passive co-development' but also targeted cash-only returns of 20% plus per annum.
In his formative career, Michael has held senior roles in international finance, banking and data companies in Cape Town, London, Brussels and Sydney prior to founding Hotspotcentral in 2009. He now lives on 5 acres in the Gold Coast Hinterland with his wife and two daughters.