Advice on finding properties

Hi Ryan,

Definitely try and get CF+ if you can. I always aim for at least 1% higher than the mortgage rate you are likely to be paying to cover any costs such as rental management, insurance, rates etc. And for added security you may want to fix while rates are at their historic low (but that's your call).

The reason to try and avoid negative cash flow is if you're trying to build up your portfolio your borrowing capacity will be limited on your second+ properties. I think many banks only consider about 70% of the rental income to cover their risk thresholds as part of your total income, so servicing additional properties/debt would limit how much more they will lend you.

As from your research, it looks pretty spot on, but the two factors that I believe drive capital growth of an area is high yield and the locals having an income that is seen to be increasing (checkout the Australian Bureau of Stats for this data). Historic growth data is never guaranteed to be an indicator of future growth, so I take that with a pinch of salt personally. Others may have differing views.

Hi Ryan,

Its a pretty big topic the topic of property investment area research and one where you will have many people tell you their method/data is superior to someone else's. Basically I have done a thesis on property research at Uni, invested in many properties of my own, built and developed around $50 million worth or high rise unit apartments and renovated units too. It wasn't until I started to do the developments that I realized how important focused research of an area actually was. Basically in easy to understand terms, you need a demand/supply imbalance in the market in order for the area to grow in value.

Property research is therefore broken up into 2 categories being statistical and fundamental. Because there are 15,000 suburbs around Australia, I needed to come up with a rating system to pinpoint the suburbs that have a demand/supply imbalance in them now and as such have the best chance of increasing in value well over the state average and in turn give you the ability to purchase more property and increase your wealth at a much quicker rate than most investors in the market. Obviously property investment is much better if you can time the market more efficiently rather than sit and wait for 5 years for any growth to occur, so this helps do that for us and our clients.

Our rating system rates each suburb out of 480 and each category is weighted according to the importance it has in the demand/supply balance. A brief outline of what they are is as follows:

1. Number of Days a house unit in the suburb is on the market – The lower the better, this shows a higher demand for that type of dwelling in the area. If the number of days have been decreasing over the past 6 months this is even better
2. % of vendor discounting – The lower this number the better as it shows that buyers have less choice and less ability to negotiate. It also indicates a suburb could be in high demand
3. Auction Clearance Rate – The higher the better. Higher numbers indicate a higher demand
4. Rental Yield – The higher the better as it indicates a higher demand in the area from renters who are prepared to pay more to live there.
5. % of Stock on Market – The lower this number is the more demand a suburb has and the higher the chance of getting a premium for the property is
6. Online Search Interest – Takes the total number of online searches in an area and divide this by the number of properties available for sale in an area. The higher this number is, the more potential demand the suburb has and the lower the supply in the market is to fulfill the demand
7. Rental Vacancy Rate – The lower this % the better it is for investors and the more demand a suburb has
8. Proportion of Renters to Owners – The lower this number the better a suburbs perception is. Owners have a tendency to look after their properties a little better than renters and therefore lift the perception of an area’s quality

If these metrics combined give us a rating that indicates the demand is exceeding supply (market is imbalanced), then we move onto the fundamental searches to validate the statistical data.

Fundamental Indicators

1. Proximity to Water/Ocean
2. Views of Hills/Mountains
3. Transport Infrastructure – Recently announced, in progress or to be shortly started that will reduce commute times to the CBD and increase demand for a suburb
4. The ripple effect of close suburb neighbours. If suburbs within close proximity have grown substantially recently, the chances are that the subject suburb will grow quickly in order to maintain a pricing balance between the growth suburb and the subject suburb
5. Project Booms – Are there any large projects nearby that will create a spike in demand (Mines, desalinisation plants, shipping ports, pipelines)
6. Ugly Ducklings – Has the suburb been branded rough or ugly in the past and the only problem with the suburb is its reputation? Are private buyers updating their properties in the area? Are developers buying up new land and building new apartments? Are businesses and trendy cafes entering the area now?
7. Urban Renewal / Government Works – Has the government put forward a proposal to improve the appeal of an area (Parks, malls, entertainment, shopping precincts)
8. Lifestyle Features – Are there any lifestyle amenities nearby like golf courses, large entertainment precincts, tourist attractions

If those 2 searches reveal that the suburb is a potential hotspot, then we drill down to find the best streets within the suburb and then find developments within close proximity to those to give the best chance of fast capital gains.

The data houses like Residex, RP Data and SQM Research provide data that fluctuates greatly, but is best used as a potential source to gather suburb short lists for investigation from. The issue with these data providers is that they don't provide past issues of recommendations to gage performance by. The trend of a suburb of interest is of particular value when deciding whether a suburb is worth fundamentally investigating. For example, it is no good going off to investigate a suburb that has been growing at 15%p.a. for the past 5 years. Like everything in life, when one area gets too expensive, people will compromise on the next best cheaper alternative until the prices of surrounding less desirable suburbs catch up.

There is so much more that could be written on the topic, but those items will give you a basic template of what you can use to instigate your research model for superior returns of investment properties.

Hi Wealthyjvd,

Yes, we do find investments Australia wide, however we don't cater to the development industry. I have completed $50 million in mixed use developments over the past 8 years, so you can ask some questions and I will most likely be able to direct you to the right place to do some more extensive investigation…

Dave Ward co wrote an article for anybody wanting more information on how to use research to drive your property search should look at this months issue of Your Investment Property magazine. Pages 54, 55, 56 & 57.

Hi Dave,
Great information and thank you for sharing with us.
I notice the metrics you have mentioned are in line with the metrics used in the newly released “Location Score” website.
It weights this metrics and provides a rating as to whether an Australian suburb is hot or not.
Are you involved in this website also?
Cheers,
Robert