G’day. My name is Ben Everingham, and in today’s video, I’m gonna talk about nine mistakes property investors make when doing suburb research.
G’day. My name’s Ben Everingham, and I’m the director here at Pumped on Property, and in today’s video, I’m gonna talk about nine common mistakes property investors make when doing their own suburb research.
As a buyer’s agent who helps about 120+ per year buy high quality investment properties, I’ve realised that there’s some very, very specific key performance indicators that are important to me before I would consider buying in any suburb and often get forgotten about or looked over from average property investors that don’t get the opportunity to buy one property every twelve months or one property every couple years and so don’t think about these things or look at the importance of some of these things that I’m about to share.
We’re gonna talk about nine different things, today. Each of these are equally important from one perspective or another and shouldn’t be viewed in isolation, but should be looked at as a bit of a collective, bigger picture. When I’m looking at a suburb, before I even jump on realestate.com or start talking to real estate agents, there’s about 31, maybe 35 key performance indicators that I look at. I think these are a few of those indicators and some of the ones that are very important to me, personally. And so, I would never, ever consider buying a property, going to an open home, or looking at an investment property even online and wasting my time before I’d looked at the suburb and made sure that the suburb data or the things that I need to know about the suburb are in line with what’s important to me as an investor that’s bought quite a bit of property, myself and a lot of property for our clients, so –
The first thing is the average investor doesn’t look at vacancy rates-end. It kind of blows my mind that you would go and spend all of this money – because property in Australia is expensive, particularly in Sydney and Melbourne – would go and spend all of this money without actually looking at who’s gonna tenant the property and what the demand for tenants in the suburb is for a particular type of property after you actually buy it, so a good vacancy rate from my perspective, because there’s thresholds with all of these indicators which I’ll share, today. I like to look for a vacancy rate below two percent.
So vacancy rates below two percent is what’s very meaningful to me. Anything below two percent in a suburb with a good number of properties in an area like a Sydney, Brisbane, Melbourne, for example – a vacancy rate below two percent would show a severe under supply of available property for rent, which means generally in real terms, you’re not gonna have vacancy if you’ve bought the right type of product or created the right type of product much below two, absolute maximum four weeks in a year in a stable market where obviously people have access to jobs and employment and income, etc. So vacancy rates are very important. Try and find suburbs with a vacancy rate below two percent.
If the vacancy rate is above two percent, it’s not a deal breaker, but just have a look at some more data because vacancy rates are released on a monthly basis, and some suburbs spike and fluctuate during different times of the year based on how much product’s being bought to market. I look for stuff under two percent which is why I think in the properties that I’ve bought over the last seven, eight years, I think I’ve had literally two weeks of vacancy combined across all of those properties.
A common thing that other investors don’t look at – which is the second point – is they don’t look at DSR scores, and in fact, a lot of investors don’t even know what DSR is. So DSR is the demand to supply ratio score for a suburb, and it’s a combination of about eight different things that are important to the company that produces this data thrown into a calculator and spitting out basically a percentage or a number out of zero to 100. I like a DSR score, when I’m buying for myself and for my clients, to be somewhere between 55 and 75 percent, which represents a marketplace that’s heating up but still represents a buying opportunity.
Anything over 75 percent is when you walk up to an open home on a weekend and you see 30 groups there and ten written offers. Like, that’s a very, very hot market, and anything under 50 percent is kind of a marketplace where the demand is pretty soft and agents really have to hustle to make sales, and so therefore, it’s difficult to get that capital growth in the short and medium term that you need as an investor, so DSR you can find online for free. Just type in your suburb name + DSR score, and it will take you to a calculator, and then you can learn more about that, but having a look at a DSR score’s important. It will give you a nice little insight into what’s happening in the suburb.
Another common mistake investors make when doing their suburb research before they buy is not looking at average annual capital growth rates or growth rates over the last three years. For me, the past doesn’t necessarily predict the future because we all know that property prices are not gonna double in the next seven to ten years in Australia, anymore, especially because they’re so bloody expensive. What average annual growth rates can help determine is how the property’s performed in the past.
So this is the major reason I only actually buy property in metro markets or major, major regional markets. And major regional from my perspective is well-located close to a capital city like Newcastle and Wollongong, maybe Bendigo and Ballarat, but I don’t personally like those markets at all, or the Sunshine Coast and Gold Coast. Average annual capital growth rates give you a bit of a sneak peek into the past, and average annual growth rates, I’m talking about the growth rates published over a ten to fifteen year period. The reason I like to buy metro property is because generally, Sydney, Melbourne, and Brisbane have all performed by at least five percent per annum over the last ten year period, and that was through a pretty low time, which was the global financial crisis, so as an investor, I’m looking to get the best return for my money or bang for my buck, which means chasing markets that historically have performed better, and because they’ve got strong populations, strong employment, strong infrastructure growth into the future – they represent more desirable places in terms of sucking people into those markets, which over time potentially increase values based on their history.
You’re looking for an average annual growth rate of above five percent if possible. With a three year growth rate being, in an ideal world, below the average annual growth rate, but in the reality of where we are, right now, which is 2017, everything’s performed well in Sydney, Melbourne, and Brisbane over that last three years, and that growth rate’s probably gonna be a little bit, if not significantly above the average. It’s just a bit of a sanity check to go, “Has this market performed well in the last ten years? 15 years? Has it performed well in the last three years? And can I see, from there, that it may perform okay in the future?”
Another thing that investors often miss or forget about is looking at the average vendor discount in a suburb. This is a huge one if you’re looking to save yourself some money. The average vendor discount is simply the price that the agents in the suburb, on average, list at minus what the properties actually sell for.
Let’s take an example of Manly in Sydney. This isn’t real data. I’m just making this up for an example’s sake. Let’s say the average property in Manly sells for a million dollars. Maybe we’re talking about units in Manly, these days. Then, the average listing price on realestate.com is 1.1 million dollars, and the average vendor discount in the suburb’s ten percent, which gives you the average sales price of around that million dollar mark. This is a trap for people that haven’t bought a lot of property before because they often look at realestate.com and go, “That is market value,” when in fact, there’s so many suburbs in Australia where agents deliberately over list so that the person negotiating feels like they’re getting a deal. Generally, I like to go, “What’s the average vendor discount?” and then I double that, and that’s the initial offer that I put in on a property as an absolute minimum market dependent. So, get to know the average vendor discount, and you can just Google more information about that. It’s really, really powerful, particularly if you’re at the submitting offers stage.
Days on market’s also important to me. A market with an average sales time from the date that they list the property online to the date that the property settles – anything under 40 days on market, and you can again, find this information online for free or at the back of the property investment magazines each month. A market under 40 days is a pretty competitive market and very difficult to buy in. A market generally over 50 days means that it’s not gonna sell at average on the first weekend unless it’s very, very well priced for a beautiful property. It gives you a little bit more time to negotiate, to do your due diligence prior to placing an offer and play the negotiation game with an agent.
The last few things I want to talk about, or the last three things out of the nine mistakes property investors make when doing their own suburb research is looking at the number of sales in the last 12 months. I, personally, only like to buy in markets, these days, where there’s at least 100 sales consistently – even in a quiet time of the market or a recession – to know that the market continues to tick away, which means, again – targeting metro markets or major regional markets with a large enough population where the number of sales in the suburb in the last 12 months can consistently stay above that 100 sales a year mark. The reason I do this, personally, is because I got burnt once buying a regional property or building a regional property where I lost quite a bit of money, and I was basically speculating on making a short term gain, which I should’ve known better. This was after I’d already bought five, maybe six investment properties, and I got a “red-hot” tip on the next hot spot where I couldn’t lose money and kind of went in and made a stupid decision by building a product that was more expensive than average in the suburb, and then, you know, in a suburb where there was literally only 30 sales a year. This meant that I couldn’t re-value the property properly because there were no comparable sales.
On the flip side, when I tried to sell the property, it was very difficult because there was about one person per year in the suburb that could actually afford that type of product that I’d created. So massive lesson learnt for me, personally. Don’t make my mistake. You don’t have to lose money like I did if you buy at the right time in the cycle.
The eighth thing that I wanted to talk about and the second-last point is most people don’t do sales history data research correctly. They look on realestate.com, and they go, “This is what stuff is listed for, therefore that is what is selling in the suburb,” and this is a massive, massive trap for people without experience because just because something is listed online doesn’t mean that you can look at the other things listed online and go, “That’s what stuff sells for.”
As a buyer’s agent that buys over 120 properties per year for my clients, I know that realestate.com listings, domain listings – actually have nothing to do with the sales values on properties, and you consistently see properties selling for 20, 50, 100 grand below what they come online for, which is why looking at the sales data is so, so important and really getting an idea of what certain types of properties are worth in the suburb that you’re focusing on. You can find this information on onthehouse.com.au for free. You can find the sales data on the “sold” section of realestate.com or domain. There’s great access to this data, these days. It’s a lot easier to find it than it was five years ago without paying a fortune for it. If you subscribe to Real Estate Investor or RP Data, then it’s obviously available there, as well, but beginning to get an idea of where market value – and market value meaning what’s actually sold in a suburb at a particular point in time is the only way to buy below market value or not overpay for a property.
Get to know that sales history data, try and benchmark the type of property you’re looking for against other comparable sales in the area, and just remember, just because it’s a four bed, two bath, two garage home doesn’t mean that every four bedroom, two bathroom, two garage home in the suburb is the same. There’s premium streets, there’s shitty streets, there’s streets with housing commission, and there’s streets with bush fire issues, there’s streets with flooding issues, there’s unstable areas and there’s very stable areas of all suburbs, and so it’s about finding comparable sales that are relevant to what it is that you’re looking to do, and then making an assumption from there and setting a benchmark of what you’re prepared to pay.
The ninth and final thing that I wanted to talk about in today’s video is demographics. And again, such a simple thing. There’s a great website – localstats.com.au where you can just punch in the suburb, and it automatically pulls all that good stuff out of the Australian Bureau of Statistics, but the demographics I’m talking about is – What’s the population? What’s the distance from the city centre? What’s projected to happen there in the future? Who lives there right now? How many renters are there as a percentage? How many owner occupiers? What are the ages of the average people that live there? What are their incomes? How many schools are there? Where’s the local transport option? Is a train station walking distance? All those important things that we intuitively make decisions on if we’re buying for ourselves, but when we buy an investment, for some reason, we forget.
They’re the nine mistakes that I find most property investors make when they’re actually doing their own suburb research. I know I’ve explained a lot of different things, but I think this information is very, very important if you want to do this properly. For any of you who are having troubles with this sort of stuff, please book a one-on-one strategy session with me. We offer complimentary strategy sessions to anybody that would be interested in talking further about the marketplace, and basically in that session, we look at where you are right now, where you’re looking to go medium and longer term, the challenges you’re currently facing, and then at the end of it, we develop a plan for moving forward with your next property. It’s completely complimentary. It’s not a massive sales call where we try and close you.
As you can see, I’m pretty casual. It would be one-on-one with me or one-on-one with my brother, and I’d love the opportunity to learn more about what it is that you’re planning on doing. Whether checking an area that you’re deciding to buy in or just pointing you in the right direction of some great information which obviously from doing this stuff 70 hours a week for so long, I’ve got a really good idea of, now, so I really appreciate your time on today’s video, and until next time, stay hungry.