How To Avoid Bad Investment Properties
No one wants to won bad investment properties that go down in value and lose you a lot of money. So how can you avoid bad investment properties and invest in the good ones?
0:00 – Introduction
1:00 – Step #1: Look at the current market and where it is in it’s current cycle
2:12 – Step #2: Have a long term approach
4:36 – Step #3: Have a good strategy
8:05 – Step #4: Choose the best performing assets to minimise your risk
12:33 – Step #5: Look for the best suburbs in an area
16:25 – Step #6: Pick the best properties in a suburb
18:55 – This is a lot of work, but it’s worth it
19:40 – Step #7: Inspect the property well and protect yourself
we all want to avoid bad investment properties you don’t know vest in an investment property that’s going to lose your money that’s gonna go down in value significantly over a long period of time a property that you’re just going to struggle with and that’s going to hold you back financially so in this episode I’m here with Simon Everingham buyer’s agent from pumped on property how’s it going yeah good thank you and yourself very good and we’re going to talk about how to identify a bad investment property so that you can just run away from that not invest in it not even going to the open for inspection for that property instead focus your time your energy and your effort on finding good investment properties that’ll move you towards your property investment goals yeah I think keeping it nice and light-hearted today we know we don’t really normally like to talk about negative things but most of these things are pretty negative but we’ll keep a knife like what kind of perspective yeah so I think let’s start out with rather than just looking honing in on the property itself we need to actually take a step back and look at a bigger picture of because there’s a saying that the rising tide lifts all boats there’s also I guess the opposite of that is that if the tides going down then the majority of boats will go down so the first step to identifying a bad investment property is actually looking at the current market so looking at the Australian market as a whole looking at individual cities and what they’re doing or whatever market is you’re looking at and look at where that market is in its current cycle and what is it likely to do in the future if we go back two years looking at Sydney and Melbourne having an extremely strong run up over a period of about three or four years growing massively you look at those markets and you say okay these markets are nearing the top of their cycle because they’ve just had such a strong run for so many periods of years exactly and then you look at other markets that haven’t had that exactly now I think there’s a few really important factors that you need to always consider and be aware of is one that property moves in cycles different periods of those cycles we get strong growth we get negative growth what we lose value and other times they sit flat as well now the other the other idea is that having a long-term approach is a much better strategy than trying to speculate and having short-term approaches so if you are in property to try and make you know one-year two-year five-year deals and money then you know you’re probably looking at the wrong asset you really want to have a longer-term approach because what we’ve seen over the history of Australian property is really strong really consistent growth over the longer term yep so then bringing that back in definitely looking at the individual markets now one resource that we find extremely helpful to getting a better understanding about where these different markets around Australia are actually situated is going online and looking at HT w’s month in review now these guys are Australian Property Analyst we’ve talked about them heaps of times you can just literally jump onto Google type in HT w month in review and what you’ll find is is essentially this circle and they’ll do it for commercial they’ll do it for residential and they’ll also do it for units so you can see what type of property that you want to be purchasing in which area is situated in that circle or that cycle now if you were to look at it today in June of 2019 you would actually find that Sydney and Melbourne at the declining phase of that property cycle if you were to go to the other side and look at the rising stage of the property cycle you’ll see places like Canberra and Adelaide and down the bottom you might see places like Perth and in that sweet spot that we really like the start of the recovery so it means it’s bottomed out and it’s now starting to potentially see some good opportunities is actually the Brisbane market as well so amazing resource to actually get a better understanding of where the different markets are situated in their current property cycle yeah and also there’s so many other resources out there as well like Residex reports there’s CoreLogic put out a monthly update as well with looking at where the different cities are so it’s about mixing everything together let’s just not look at her and Todd white and say okay this is canon this is exactly what’s going to happen because obviously they’re trying to predict it as well but mixing that with to get a fuller picture of the market and where we want to invest and I think something we didn’t touch on that probably even comes before that to avoid a bad property is to have a good strategy oh yeah so if you have a bad strategy it’s so easy to find a bad property to lose money on it’s so easy to invest our in bad properties and it’s so much harder to invest in good properties but having a good strategy is even a probably the most important thing when it comes to investing to understand exactly what you’re looking for exactly why you’re looking for that type of property and then what sort of numbers knew what the numbers need to look like for that property to actually move you towards your financial goals so so many people talk about I want to invest in property I want to buy property it’s okay what’s your end goal I don’t know how much income do you want passively I don’t know like what sort of properties do you want to buy together I don’t know so working that sort of stuff out is really key treating it like a business like don’t just go I want to invest in property because my friend invested in property like you know have a better understanding of why I think that why is the most important question to wise like why do you want to invest in property because I want to achieve financial freedom why do you want to achieve financial freedom because I want to have choices in my life cool okay now what type of property are you going to invest in I don’t know well what do you want to achieve in the future well I want to achieve financial freedom or what does financial freedom mean to you okay it means having a hundred thousand dollars worth of passive income to live off okay well maybe we should start considering these assets because if you purchase these assets in that period of time you should be able to achieve your financial goals so it’s about having a financial goal and then looking at okay what’s the best asset to purchase or to invest in that’s likely going to lead me towards those goals and obviously we don’t have a crystal ball so we don’t know how everything’s going to work out but you’re making your best assessment on what you want and what you think’s going to get you there hmm so if you want to learn more about a low risk strategy of investing in the current market we do have a strategy that we call the two properties to financial freedom strategy which is effectively investing into quality properties in metro markets building granny flats on each of those properties so you got four incomes from the one property so you can get that good market good growth long-term sustainability and effectively eventually pay off those properties and live off the rental income so if you want to learn more about that strategy go to onproperty.com.au/session two properties and you can download a cheat sheet there that really outlines that strategy in detail so you can get an idea of it or if you’re kind of on the next step in you’re like I’ve got a deposit I’m ready to invest but I don’t know where to invest or exactly how that strategy works for me or which strategy is going to be best for me then the team over here at pumped on property do offer free strategy session so you can get on the phone with them talk about your situation in more detail and what you’re trying to achieve and then they can personally walk you through okay what are your property investment goals and how can we help you get there set up a strategy for you and then you can go and implement yourself implement that yourself or you can choose to work with them so go to onproperty.com.au/free strategy to learn about that free strategy session over there and there’s actually a calendar there where you can book in a time that suits you so I’ll link up to those down below or just type in to your phone and go to onproperty.com.au/free G so once we have our strategy we’ve looked at our markets what’s next so you know as you said before we can not predict the future we don’t know what the future is going to hold but as a lot of economists say sometimes the past leaves some pretty interesting clues so what we’ve done is we’ve looked at multiple different resources multiple different data points and identified you know what assets have performed the best in Australia now we read this article that a while ago produced from core logic RP data and what they were talking about is is houses versus units so what they were actually indicating is that houses have outperformed units by over 85 percent over the last twenty years so what that tells me is houses outperform units so I’m going to be focusing on houses yeah so this is kind of wrist minimization so if you’re trying to avoid a bad property obviously there’s some great unit investments out there we’re not saying that units are bad investments but if you look at the stats and looking to try and minimize your risk with investing if you look at the history and you say as an average houses tend to outperform units over the longer term over the longer term and then also houses obviously give you more control over your asset in terms of development in terms of managing that property as well so there’s some benefits there then it’s like okay I’m going to minimize my wrist and look at how to do houses exactly so these are all little risk minimization technique so the same rules well I guess the same with metro markets versus regional markets similar studies were done to show that metro markets outperformed regional markets over the long term so obviously there can be great regional markets but to minimize your risk you can look at houses in metro markets to minimize your risk multiple times exactly in our strategy is low risk long term so we’re always looking at ways to minimize our risk and ways to get the best return over the longer period of time you know you can couple on top of that looking at history if what particular markets have performed the best and if you were to look at the last 50 years in Australia data from home link or logic you would find that Sydney Melbourne and Brisbane have been the top performing markets over the last 50 years over the last 20 years Sydney Melbourne Brisbane and Perth have all been the top performing markets in Australia if you look at the predicted figures it said that Brisbane Sydney Melbourne are going to get around 75 to 80 percent of Australia’s population and job growth which is really interesting to me these are the areas that have had historically the strongest population and job growth you know if you’ve got lots of people moving to a particular area you’ve got these people getting great jobs you’ve got consistent infrastructure growth all of these things once again risk minimization and you’re trying your best to identify areas that are going to give you good consistent growth yeah so let’s then contrast that to what I would not invest in which is something like a mining town it’s obviously going to be much more high-risk I think again people have gotten good growth in mining towns but we’ve also seen so massive mining town crashes I remember because obviously being the positive cashflow space for over a decade now people used to invest in Port Hedland and South headlands and then those had massive crashes in terms of the prices and the rental yields of those areas there’s just there in the middle of nowhere they’re completely reliant on the mining in that area and if mining takes a downturn or a particular mine closes then all of a sudden you’ve got a flood of people leaving that area you’ve also in that area most people who live there a fly-in fly-out workers so they’re not even living there the whole time and yeah there’s just not that infrastructure growth there’s not that long-term sustainability with that property yeah well there’s there’s clues right and look at what’s perform the best in the past that areas with great population growth great infrastructure growth consistent job growth like these have been the areas that have consistently performed the best over the longer period of time now that’s all we’re talking about here we’re not talking about speculative areas and short-term high-risk investments because that’s not our strategy that’s not how to avoid that but you point the high-rez how to avoid the bad ones exactly obviously if you want to do high-risk go ahead and do it but that’s not us exactly so there’s so many different ways that you can avoid these these opportunities and I think having that longer-term approach understanding your strategy so looking once you’ve done the market then it’s about looking at the suburbs within that market and doing the research to look at okay which suburbs within this market are likely to have that long-term demand and long term capital growth and we’ve done so many different episodes on exactly how to do this but part of the research is looking at different statistics like the DSR scored demand to supply ratio looking at things like vacancy rates looking at incomes in the area looking at population growth in the area there’s so many different things to look at but what you want to do is basically create a map of the market that you’re in and compare the suburbs to each other and if you’re trying to avoid the bad suburbs you want to look for the red flags within that suburbs or what I call red flags which is I guess wrist signs or warnings within that suburb so if I see a sub that has an above 2% vacancy rate that is a red flag for me and I likely wouldn’t consider that so them to invest in because the vacancy rate is just too high if I see a suburb that’s got an abundance of land available with different developments opening up that’s something that we would avoid as well because that could fluctuate those vacancy rates it could fluctuate the demand to supply ratio in those areas because you’ve got hundreds if not thousands of properties coming on to that market at one at one time so avoiding those types of areas and focusing on areas that are already in field have already got great demographics have got the good public transport systems have got the good schools have got the good amenities and historically closer to the CBD has worked a little bit better so avoided purchasing you know 50 60 70 kilometres from the CBD yeah and so you’ve got so many different things to look at and within each major market suburbs move so differently to each other so in Sydney as we record there Sydney’s gone down about 15 percent since its peak you’ve got suburbs in Sydney where the demand is still really good where they’re hardly declined at all in areas that have been growing in the last like month or two and then you’ve got areas that have gone down significantly over 20 percent so even within that market it’s very different the same with Brisbane you’ve got areas that are declining and you’ve got areas that are actually growing and there’s huge demand in those areas and it’s really difficult to buy properties in those areas because so many people are trying to buy them so within every individual market suburbs move very differently so you need to look at the suburbs and do your analysis on that and make sure you avoid those suburbs with the big big red flags generally speaking one red flag is not going to cancel out a suburb completely unless it’s something really bad like a super high vacancy right no thanks but a lot of these little red flags tend to add up and when you start to compare the suburbs to each other and you see okay this once other might have one little red flag but this other suburb has two big red flags and five little ones the you know each other you can start to see okay which suburb is more likely to lead to a bad investment and which servos more likely to be low risk and have better long-term potential yeah and you can set yourself up a little checklist or a little you know one-page are where you can compare compare suburbs or suburbs and write down all of those key performance indicators that are important to you write down the red flags and you know get a little bit of a key understand where you’re gonna draw the line or you know how to compare one suburb to the other because you know some you know most suburbs is going to be something bad that you can pick out there’s always going to be main roads there’s always going to be areas that have got you know a high percentage of rentals in that particular suburb but you know you’re looking at the overall I guess performance of this suburb or yeah well now even goes to picking individual streets within that suburb or individual areas within that suburb yeah it goes to as granular as speaking okay do I want to buy the cheaper part of the suburb the middle part of the suburb or the more premium pocket of the suburb and there’s depending on the suburb depending on your strategy will depend on what you want to do and then once you’ve done your suburb analysis and even broken down the suburb then it comes down to the property and looking for how to find the best property in the suburb and how to avoid the bad properties within the suburb and I did a great video with Ben talking about how to find the best property in a suburb where we talked about all this stuff in granular detail which I’ll link up down below but generally it comes down to avoiding things like main roads avoiding things like being on train lines avoiding things like being under power lines and stuff like that some of these things again you’ve got your red flags of individual properties that you might want to avoid that might hurt the long-term capital growth of that property or hurt the rent ability of that property so within a suburb even with a low vacancy rate if you’ve got a property that is under a giant power line that property can take longer to rent and might rent for less then if you had a property in a cul-de-sac in a good leafy green part of the suburb that has no power lines or train station behind it or something like yeah exactly so you can print out yourself a suburb map and start to map out these main roads a train line to commercial areas the schools you start to pinpoint exactly where the more expensive properties are selling and the cheaper properties are selling in you start to get these little maps or little bubbles in in within the suburb and you’ll see where the premium pockets are and where the lower quality pockets are and then you drive through that suburb and you drive through the cheaper areas and you’ll go oh okay I get it you know there’s main roads as a train line there’s power lines and then you drive through the nice areas and you’ll notice that they’re off the main roads that you know may be parks or really nice areas and you start to understand okay all right this makes sense now so not just going to the days where you just purchase a property and you know cross your fingers and hope to god that it does well like there are certain rules that you can follow in order to not purchase these bad investments but set yourself up to get great investments that hopefully you’re going to outperform the average of you know the market but also that suburb longer term yes and if this is sounding like a lot of work like it is work ID it is work as you start to do this more and more which obviously we do a lot it gets really easy because you have templates set up and you know exactly what you’re looking for it’s really easy to compare suburbs to each other but in the beginning when you’re starting out it’s a lot of work the majority of properties in Australia will not suit you and your investment strategy and your property investment goals the majority of properties in Australia are likely going to be bad investments for you it takes worse work to sift through all that crud to stick up and come for free guys yes it’s not just buy anything and it’s going to go up in value it takes work to do this and we’re kind of running out of time in this video but when it comes down to the property level as well you’re looking at make sure you do your analysis of the sales history in that suburb what properties are selling for you should know before going to inspect a property what you think that property is worth in the market because of your past research that you’ve done so rather than just relying on the agent you should have a rough idea of what the that property is doing things like building and pest inspections having clauses within your contract – you know finance clauses or building and pest clauses as well to protect yourself and avoid yourself from bad properties that when the building and pest inspection comes back and it turns out the piers are all rotted and need to be completely replaced termites throughout the job know there’s there’s so many things that can come up and once again that comes back to your strategy and you know do you did you want to renovate it did you want to knock down job or do you want something that’s super low maintenance you don’t have to worry about its tenant ready so you know all of these different things come into play yeah so there’s some ideas to avoid a bad property as you can see once you go through all of this it just starts to cancel out so many different markets different areas different suburbs different pockets within a suburb different properties until you’re left with basically this mini list of properties that actually fit your criteria and then you’re going to open for inspections of those properties and then add the open for inspections then some of those will be cancelled off your list as well so rather than I guess searching for that hidden gem it’s more like cancelling out everything else and you’re left with just a couple and then finding the best properties within that so you’ve ideally avoided all the bad properties you’re not really inspecting all the bad properties or any bad properties or you might inspect a few that end up being duds but you can avoid them yeah so keep owning back to the strategy but just knowing exactly what we want and I love that I love the fact that it cancels out all of those are the properties because it means that I don’t have to research so many properties and once you truly understand the suburb that you’re thinking of investing in as well as you possibly can you know you literally look through the list in that one or two suburbs that you’re focusing on and you know you’ll start to understand the streets and you’ll just cancel them out straight away you’ll start to you know understand okay well this one’s like $60,000 below the median price in this suburb and you click on a new book oh yeah that’s because it backs on to that retail shop or this and that so it makes it a bit easier once you do cancel out all of these opportunities because they’re not going to serve you and your purpose in your long term strategy yeah and so it all comes back to starting with strategy and if you do need help getting clear on a strategy that’s going to work for you and how you can successfully build your property portfolio then again those pre strategy sessions are available so you can get on the phone get clear with where you’re at and get clear with a strategy that can suit you and see what your goals are and what your risk profile is so go to onproperty.com.au/mortgage slash strategy to learn more about that and to book in a time over there thanks so much for tuning in and I will link up to that video I did with Ben on how to find the best property in a suburb so go ahead and check that one out if you haven’t already and until next time stay positive
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