Today’s post is the third in a series covering questions I get asked the most when doing a public presentation.
Here are three of the most common questions I get asked:
- “When will the market recover & how can you tell?”
- “What’s hot?” Which really translates to “What should I buy?”
- “What makes a good investment?”
Today we cover the third one – What makes a good investment?
As many of you know, it is my opinion that property investors spend far too much time on ‘where’ they should buy & not enough on ‘what’ they should be buying.
And while part of my reply as to what makes a good investment has to do with ‘place’, most of it relates to the actual ‘product’.
When I cover this question in our “Market Outlook & What To Buy” presentations, I usually raise my hand and say, “If the property passes the five finger test then, for mine, it has a great chance to be good investment.”
The five finger test
1. Market Depth
How deep is the market you are buying into?
In other words, how many sales take place in the area each year & in particular, how many sell within the price band in which you will be reselling your property?
Median prices provide little guidance to you here.
You need to know the actual sales volumes by price group.
A short cut here is to buy in areas with economic diversity.
One or two horse towns are out – I don’t care how great the yields may be – unless there are many irons in a location’s fire, they usually aren’t good places in which to buy investment property.
Stick to the capitals & major centres.
Because there will be enough market in the future for you to actually sell to.
So your thumb is market depth.
2. Owner-resident resale appeal
Does what you are buying have owner-resident resale appeal?
Is the general area attracting more owner-residents over time?
Why this is important is that it potentially doubles your resale audience, as there are twice as many owner-resident buyers across Australia than investors.
Your index finger is that you should always buy a product that has the potential to resell to an owner-resident.
Small projects; well-sized & well-designed; good aspect; view if possible; & local gentrification are just some of the things to look out for.
3. Potential upside
What is the location really like?
It needs to have high amenity – this helps with regard to owner-resident resale appeal plus better tenants – and use walk score to make initial judgements about a location.
But remember it is ‘real’ estate after all & you must inspect the location or send someone you truly trust to do so for you.
A quick drive-by won’t cut it either.
You need to inspect the area with both eyes fully open.
Also, there must be employment generators in the area & employment numbers need to be growing.
Don’t worry too much about local unemployment; it is the number of actual local workers that mean the most to you as an investor.
The ABS Census can help here & use the working community profiles.
And thirdly, is there any new infrastructure proposed in the area?
Most councils have such information on their websites.
Pollies love to cut ribbons & open things, so government departments document such things in advance.
The best things that help drive up value include transport initiatives, especially public modes such as railway stations; new offices or retail expansion and major new developments like hospitals, schools & to some degree industrial estates.
Your middle finger is potential upside.
4. Rental appeal
I used to think this part was bloody obvious; & I am always amazed when I ask an investor (or developer for that matter) to describe who is actually going to rent the property, & all I get is a blank stare.
Sometimes they reply by saying, ‘renters’.
I kid you not.
You need to understand who & why a certain type of rental demographic will rent your property.
You need to know how many of that rental demographic subset lives in the area.
Your property should appeal to two out of three of the largest rental demographic segments in the local area.
Again the ABS Census can help; this time look at the community profiles & you will have do to some basic maths.
For example, does your one-bedroom apartment in New Farm appeal to a single female renter?
Does it also appeal to a young couple in their mid-20s to early 30s?
Does it also appeal to older single males?
Well, if single females rent in the same building then one could say yes…but you get my drift.
Who will rent your property & why?
And does that rental market segment exist in the area?
These are three important questions and they make up your ring finger. Getting ticks in the right boxes here means a better investment.
5. Finally, could you live in it?
If things went cactus, could you live in this property for a period of time?
This isn’t really a financial safety net; but it usually means that the property has ‘good bones’ & a half decent standard of finish.
This translates, in turn, to better tenants who stay longer.
And your pinky is, could you live in it?
A good residential investment needs to pass a simple test