[Podcast] Is property investing an art or science? With Brett Warren, Summer Series

Our property markets are changing, and we’ve now moved into the adjustment phase of the cycle where there will be less capital growth and where, in many locations, property values are falling.

So, what should a property investor do?

Well, in today's show with Brett Warren, national director of Metropole Property Strategists, we talk about whether property investing is an art or a science, which you'll need to understand if you want to be successful in these more challenging times.

And I share some major structural shifts that created property booms in the past and what I believe the next one is going to be.

Is property investing an ‘art’ or a ‘science’?

Both. It’s true that successful property investors need research and data to aid an investment decision, but it’s not enough on its own. Investors must also complement applicable data with local area knowledge, expertise, experience, and perspective to make the best-informed choices.

Someone looking at data can make it say almost anything they want; the trick is knowing how to take that information and use it with some practical experience to make an investment decision accurately.

Experienced buyer’s agents are so valuable – they bring the “art” part of the investment equation to property investors who have done internet and data research to cover the “science” part of the investment.

3 types of investors

So, Let's look at the three types of property investors.

1. The passive investor

A passive investor tends to spend little time doing any due diligence and is keen to buy one of the first properties they come across. The passive investor tends to let their emotions get involved in their investment decisions, which we know can lead to disastrous results.

2. The active investor

An active investor puts in some degree of work to find a good investment prospect, including conducting some due diligence in the hope they can increase the likelihood of making a good and viable investment purchase. They generally look to gain a basic understanding of the principles involved in property, finance, and taxation and would look to seek professional advice for help with structuring a portfolio.

3. The analytical investor

An analytical investor is the far extreme of a passive investor. Instead of undertaking little research and due diligence, this type of investor tends to go overboard and spend months or even years examining data, seeking advice and reading material to look for the ‘ultimate’ investment property.

What research do you need to do?

Rather than doing the type of research most people do and looking at how a location has performed in the past, I look at the factors that will drive the location's performance in the future, and these include:

• Demographics and population growth
• Economic and employment growth, which leads to wages growth and the ability to afford properties
• Infrastructure growth
• Supply and demand

I also look for multiple growth drivers because we have all recently seen the result of those investors who chose areas with a single growth driver or single economy, such as during the mining boom.

My top-down approach

As explained, this starts with examining the macro factors affecting our property markets and drills down to the micro level.

I start by looking at the macro-economic environment – the big picture of how Australia’s economy is performing.

Then I look for the right state in which to invest – one that will outperform the Australian market averages because of its economic growth and population growth. property economy market

Also, I only invest in the capital cities and not in regional areas because that’s where the bulk of the jobs will be created and where most people are going to want to live in the future.

Then within that state, I look for the right suburb or group of suburbs with a long history of outperforming the averages.

Then I look for the right location within that suburb. Some properties will always be more desirable than others and outperform as investments by increasing more in value.

Then within that location, I look for the right property using my 5 Stranded Strategic Approach, which I will explain in a moment. And finally, I only buy at…

The right price, but I’m not suggesting a “cheap” property – there will always be cheap properties around in secondary locations. I mean the right property at a good price.

My 6-Stranded Strategic Approach

Once I’ve found the right location, the next phase of my research is to find the best property for me to buy using my 6 Stranded Strategic Approach, which involves the following steps:

1. I only buy a property that appeals to owner-occupiers. Not that I plan to sell my property, but because owner-occupiers will buy similar properties pushing up local real estate values.
2. I only buy a property below its intrinsic value.
3. I buy properties with a high land-to-asset ratio – that doesn’t necessarily mean they have a large plot of land; they can be apartments with a high land value under them.
4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area.
5. I also look for a property with a twist – something unique, special, different, or scarce about the property, and finally…
6. I only buy a property where I can manufacture capital growth through refurbishment, renovations, or redevelopment rather than waiting for the market to deliver me capital growth.

Structural shifts

We recently experienced a “once in a generation property boom” where the value of almost every property in Australia increased by 20% -30%.

I’m old enough to have experienced a few of major structural shifts that underpinned previous property booms..

In the 1970’s

• High Inflation
• In the 1970s, women went to work, and banks started accepting their second income giving the average household twice as much borrowing capacity.

In the 1990s

• We had deregulation of banks, and nonbank lenders came in, allowing people to borrow 95 to 100% - loan to value ratio – this led to a significant property boom in the late 90s

The early 2000s

• We had a mining boom that created significant wage increases not just in Western Australia but around Australia, again giving people the capacity to borrow significantly more money.

Late 2000’s after GFC

• Another mining boom
• After the global financial crisis, Australia became a preferred destination for significant foreign investment in residential Real Estate, where foreigners saw residential Real Estate as relatively cheap compared to back home, so once again, it was a structural change pushing up the value of residential Real Estate in foreigners outbid locals for many properties.

In 2020 - 21

• it was a significant structural change as interest rates dropped considerably and significant government stimulus at a time of demand created a once-in-a-generation property boom

The next significant structural change will be when boomers as a generation die off and transfer $6.2 trillion worth of wealth in their residential Real Estate to their families.

Links and Resources:

Michael Yardney

Brett Warren – National Director Metropole Property Strategists

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Some of our favourite quotes from the show:

“We know that location’s going to do 80% of the heavy lifting, and then choosing the right property in that location’s going to do, I guess, the other 20% of it.” - Michael Yardney

“The last boom we had was a significant structural change of releasing the pent-up demand you could get out, as well as very low interest rates.” - Michael Yardney

“We’ve also got to remember that even though the world does break, it fixes itself, and we get back to normal again.”  - Michael Yardney

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