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6 metrics to consider when researching property

researching property

6 metrics to consider when researching property

By Bianca Dabu | 09 March 2021

Property research can be daunting, especially for first-timers, but two property gurus and self-proclaimed data nerds lay the groundwork for smart investing.

The co-founders of The Property Nerds, Arjun Paliwal and Kent Lardner, recently released a 154-page Australia’s Top 20 Investing Regions for 2021 report, using data to track down the best-performing markets in the country.

In terms of methodology, the duo explained their processes of data shifting on a recent episode of The Smart Property Investment Show.

“We had to sit back and thought, ‘There”s regions I like, there’s regions Kent likes and then there’s regions where we think others may like. This made it pretty hard to begin with,” according to Mr Paliwal.

“But then we came back and thought about it and said, ‘What do investors really want? They want good capital growth in an area with relatively low incoming risk, combined with a property that gives them a good yield and is easy to rent.”

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Putting biases aside, Mr Paliwal and Mr Lardner “let the data speak” and came up with six key metrics that ultimately helped them identify the best markets.

1. Building approvals

When studying price growth, the building approval pipeline could tell an investor about the potential movement of the market over the short- to long-term.

“We made a conscious decision to focus specifically on houses… because at a national level, we saw a lot of risk associated with apartments.”

“We effectively look at how many properties are in the building approval pipeline, relative to how many properties are in that region,” Mr Lardner explained.

According to Mr Paliwal, looking at the last 12 to 15 months of approval data can also reveal possible risks.

“So, the key is when we look at those last 12 to 15 months of approval, we’re genuinely able to see, ‘Hey, what’s going to come up here,” Mr Paliwal noted.

2. Inventory levels

Determining inventory levels means “perfectly combining listings and sales in one picture”, Mr Paliwal said.

Inventory levels look at the combination of sales averages and numbers of active listings online. “Low inventory number equals more market pressure” as more people can sell faster on the back of a surge in buyer demand, according to the researcher.

“It tends to mean that a vendor can sit back and go, ‘Why should I discount? Why should I make my price cheaper?’”

3. Days on market

This looks at how fast a property is selling in comparison with historical data, Mr Paliwal said.

‘How fast is something selling? What was the difference between last year?’ are some of the key questions The Property Nerds ask.

4. Vacancy rate

Vacancy rates are a reflection of all the available properties in a rental market – properties still vacant after three weeks of advertisement.

“We measure that relative to how many properties are advertised by real estate agents. So, it’s not how many properties are rental properties in a suburb or the region, but how many are advertised,” Mr Lardner said.

According to Mr Paliwal, a vacancy rate of 0 to 1 per cent spells a rental crisis. The next range of 1 to 2 per cent represents a tight market, while the 2 to 2.5 per cent range signifies a “tighter” but balanced point.

Mr Paliwal noted that anything above 2.5 per cent is when the caution alarm goes off.

“Above three, renters you choose your price,” Mr Paliwal said.

5. Rents

Talking about rents from a data perspective, Mr Lardner explained that the reference point here is the advertised rental.

What investors need to pay attention to is the median price of the advertised rental and the percentage changes – looking for those rising rents.

“When we’re talking about houses, we’re looking to group houses and duplexes. When we’re talking about units, we’re talking about anything that is strata,” Mr Lardner noted.

6. Rental yields

A rental yield is the annual rental expressed as a ratio of the purchase price.

Mr Lardner advised investors to be cautious with the published rental yield data, because most are derived on the basis of the median rent and the median sale price, meaning that if you’re buying a property that is not at the median, you can’t be sure that’s going to be the most likely yield.

“The smaller priced properties, the bedsits, have always had that higher yield,” Mr Lardner revealed.

“What I always like to do is to take the median of a one-bedroom unit in terms of both sale price and rent price and use that to calculate the yield. That gives you a bit of a more accurate figure if you’re doing the analysis as an investor,” Mr Lardner said.

This can then be adjusted depending on the size of the property you’re looking to buy.

 

Tune in to the second episode of The Property Nerds podcast to know more about the rise of regional areas and other projections for the property market in 2021.

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6 metrics to consider when researching property
researching property
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