How Do I Know Which Property To Buy? (Ep276)
With so many properties available for sale in Australia how do you know which property to buy and which is going to be the best investment for you?
So you decided you want to invest in property. But how do you know which property to buy? There are so many different properties out there on the Australian market and it could be very difficult to know which property would be best for you and which property is going to be good or bad investment.
Hey! I’m Ryan from onproperty.com.au, your daily dose of property education and inspiration. And I’ve got some things for you to think about and some things that you can do to make sure that the next property you buy is the right property for you.
The first thing that you need to do is actually have financial goals that you’re striving towards and most people don’t actually do this. Most people don’t have set financial goals that they’re moving towards because the fact of the matter is you don’t want to buy property just for the sake of owning property so you can be happy to own a property and be a landlord. You’re likely buying property to eventually achieve some sort of financial goal in the future. Now if you know exactly what your financial goal is, “Okay my financial goal is $50,000 per year in passive income,” or “My financial goal is $1 million in equity.” If you know your financial goal, well then you can assess the properties on the market and you can work out, “Okay, which property is likely to move me towards my financial goal faster?” And then you can obviously go ahead and try and choose the property that’s most likely move you towards your financial goals faster.
Because the fact of the matter is there are some properties in the market that are good investments for some people but not good investments for other people. So depending on your situation and your financial goals, that’s going to change which property is going to be right for you and will help you to know exactly which property to buy.
The second thing you should do is try and avoid unseen big expenses. So these are expenses that are not seen by the tenants so they are not seen by the person buying the property and cost a lot of money and don’t tend to add a lot of value to your property. You can avoid these unseen costs by getting a building and pest inspection done and by doing a proper inspection yourself. But I’m talking about things like electrical rewiring that needs doing, often the roof needs fixing or re-stumping or these issues that are behind the scene and don’t add any appeal to your house in terms of the way it looks but they cost a lot of money and obviously they are done to keep it safe and to keep it structurally sound.
So a lot of people talk about investing in property that has good bones but might need a facelift or something like that. So basically by doing your due diligence, by getting a building and pest inspection done, you could hopefully avoid those unseen big expenses that costs you a lot of money but don’t likely add any value to your property at all.
Tip number 3, when you’re thinking about how do I know which property to buy is actually to project ahead and to think, “Okay, if I buy this property, what’s it going to be doing for me in 2 years? In 3 years? In 5 years? In 10 years? In 20 years? How is this property likely to perform and how’s it going to affect my life and my financial situation?” When you’re projecting ahead as well, try and think about things like varying interest rates because interest rates change and they’re very low at the moment so don’t assume that interest rates are going to stay extremely low for the next 5, 10 or 20 years. Also when projecting ahead, think about your life, think about your career, think about the things that you want to do and things that might change. And also think about things that might not work out in your favor: personal disasters, career setbacks, financial issues, medical bills, things like these.
Try and set yourself up and when you’re projecting, actually think about, “Okay, worst case scenario, if bad things happen, if my career doesn’t go the way that I want, or if I’m stuck in the same income for the next 20 years, how’s this property going to perform and is it going to be good for me?” Because often we can buy a property and we can project equity into the future but the property’s so heavily negatively geared that if anything happens to us in terms of getting fired, getting redundant and then earning less money than we’re earning now then we probably can’t afford the property. So project forward, both projects the value of the property and how it’s going to perform financially but then also project forward a worst case scenario and think about, “If things happen in my life, is this property going to help me and keep me on my feet? Or is this property actually going to eat me alive when the bad things happen?” So projecting forward is a great way to start forward. Is this property going to be good for me? Or is it going to be bad for me?
The fourth thing that you should do to work out which property to buy is research. Research, research, research! Did I say research? Research is so important when you’re looking at a property to buy because you need to understand the area and how the area’s grown or how it’s likely to grow in the future. You need to understand what people want in the area and you also need to look at the property itself and make sure that the property is in good condition and make sure that the property’s not overpriced.
So I’ve got a few things that you can look at when researching both an area and researching a property. I’m going to go over these. I’m not going to go on intense detail on these. If you want something that is much more detailed, then check out On Property Plus, which is my premium membership community. Go to onproperty.com.au/plus where I will go into more detail over these different research techniques and show you exactly how to do it. But you should get a gist, you should get a good idea from this video nonetheless.
So let’s look at suburb analysis first because before you start looking at properties and whether a property’s overpriced, you need to understand the suburb that you’re investing in and make sure that that suburb is going to be a good investment.
So the first thing that I always look at when looking at a suburb is look at population growth or decline. Is the population growing? Or is it declining? Population growth is generally a good sign because it means there’s employment in the area, more people moving into the area, leads to more demand for properties in the area which generally increases prices. If the population’s in decline, people are leaving the area. That could be a sign that the area is in trouble and obviously the more people that leave, there are still properties there, so supply tends to become larger than demand which pushes the prices down. So look at population growth or decline. You can find this out really easy by just going to the census quick stats page. So just go into Google and type census quick stats and you can look at stats from 2011, 2006 and 2001 to see how the population’s changed over the last 10 or so years.
The second thing to look for is vacancy rates. We like to see low vacancy rates which is an indicator that there is good supply of properties in the area. If you see vacancy rates that are over 5% then often this is a red flag for an area. If you see vacancy rates below 3% then this is generally a good sign for the area. You can find out about vacancy rates by going to onproperty.com.au/150 and I did a full episode over there on exactly how you can find vacancy rates for an area to make sure that properties in the area are in high demand.
The third thing that you can look for when researching a suburb is the percentage of renters in the area. Again, we’re going to be using census quick stats to find the percentage of renters in the area. Basically, what we are looking for is that there is a percentage of renters in the area and that people will be willing to rent your property. We are also looking for areas that have a really low portion of renters and we need to look into why that is. Or areas that have an extremely high percentage of renters and we would need to look into why that is. Generally, we see rental populations around the 30% to 40% mark as a pretty normal statistic.
If you start seeing rental percentages below 20% so less than 20% of the population is renting in an area, then you would want to find out why that is. I don’t think that’s necessarily a bad sign but it doesn’t mean that people don’t want to rent in the area. It doesn’t mean that more people can buy in the area and that’s they don’t need to rent. So just something to look into. And if rents are over 40%, over 50%, we need to find out why people don’t want to own their own house in this area. Is it a very transient town? Is it a mining town? Is that dominant on 1 particular industry or 1 particular company? So if you have excessive amounts of renters well that can show you that this area could potentially be high risk because most people investing in that area are investors and they do not actually purchase the property in that area themselves.
The fourth thing to look at when looking at an area is the capital growth trend. So you want to see how has this area performed over the last 12 months, over the last 3 years, over the last 5 years, over the last 10 years as well. And you also want to look at surrounding suburbs and how have they performed in terms of capital growth. Is this an underperforming area that has only grown by a couple of percent over the last 10 years on average? Or is it an area that has consistently grown and is likely to consistently grow in the future? Now the past is not always a predictor of the future. But as Ben Everingham from pumpedonproperty.com said, looking at extremely long growth periods like 10 years or more can be a great way to understand an area, to understand whether it’s likely to grow into the future.
It will also show you that not all areas are created equal and when people say that property tends to double every 7 to 10 years in Australia, you can see some areas that have definitely not doubled in the last 10 years. And so it really does indicate to you that you need to choose a property in the right area and you can find these out simply by buying a property magazine and looking at the back of the property magazine and that will show you 12 months, 3 years, 5 years and 10 years growth for an area and you can see that over there.
The fifth thing to look at when looking in an area is the average days on market that a property takes to sell. What this means is that if you put a property on the market, on average it’s going to take x number of days in order to sell that property. Now this is really important statistic to get an idea of how you could best negotiate for a property because if you know that there’s actually a long cycle time between listing a property and selling it, then you know you that you can take your time negotiating that property.
Look into everything. Make sure it’s the right property. If you know it’s really a short time, then you need to act quickly and you need to have everything together so you can make offers quickly. And so that’s going to change your strategy. It’s also important to know that because when it comes time for you to sell that property, which in most cases a lot of people will eventually want to sell their property, you can know that it is going to take roughly this many days to sell my property and you can prepare for that. Especially if you’re investing in rural areas or regional centers, sometimes some areas take almost a year to sell a property. So if you know that if this property will take a year to sell, you can think, “Well, I have 50 grand in equity, if I sell my property after this. . .” You can get that out straight away and go and invest somewhere else. There’s going to be a lag time of about 12 months before you can access the equity if you’re selling your property.
The sixth thing to look at when doing your suburb analysis is the number of sales in the area. I find that this is a helpful statistic just to see what the turnover is in an area. Is there a lot of sales over the last 12 months or are there just a few sales over the last 12 months. And this is similar to looking at the average days on market. It just gives you an idea of what the demand is in the area for the properties that you’re looking at investing in.
Alright, so that covers our suburb analysis. We looked at population growth and decline, vacancy rates, the percentage of renters, the capital growth trend – both short and long, the average days on market and then the number of sales as well.
Now let’s go into particular properties. If you research a suburb and you found the suburb you’re happy with it, it’s got all the indicators that you want, you found a property now, let’s look into that property in more detail. What are some of the things that we can look for, what are some of the research that we can do so you can know which property to buy.
Well the first thing that I recommend you check out is the cash flow analysis. Do a cash flow analysis of the property. What I mean by this is work out how much rental income do you expect to come in for this property and what are all of your expenses going to be. Not just your mortgage but all of your expenses. We’re talking rental manager fees, insurance, council rates, water, maintenance. . . There’s a whole bunch of expenses that go into owning a property. So look at how much rent is coming in and what expenses are going out and what is left over at the end of each month or what do I need to pay into a property at the end of each month. Very few investors will actually go ahead and do this cash flow analysis before they invest and this can seriously affect your cash flow. So it’s very important that you do it. Cash flow analysis is not difficult to do.
You just need to calculate the total rental income of the property and then add up all your expenses and then take away your expenses from the rental income and see what’s left over or what you need to pay. You know what, a simple way to do it; there is an advance property calculator. I am looking at releasing this in a free version, a limited free version towards the end of this year. But you can probably get it at onproperty.com.au/calculator if you’re listening to this in a few months’ time. But at the moment it’s just available inside On Property Plus, which is my premium membership area at onproperty.com.au/plus. But this calculator automatically does that stuff for you so you can get a rough estimate of what your cash flow is going to be before you go ahead and look into this property, visit the open homes and all that sort of stuff.
The second thing you need to look for when doing your property analysis is the type of property. Now, obviously you know the type of property. If you’re looking at houses, you know it’s a house. So I’m not talking about find out what type of property it is. You know what type it is by looking at it. But what I mean is find out what types of properties do people tend to live in in that particular area. And you can find this out by using the census quick stats. Just Google census quick stats and you bring it up and you can look at the dwellings in the area.
And you can find out do people live in 1-bedroom, 2-bedroom, 3-bedroom, 4-bedroom or more or 5-bedroom houses. Do people live in detached houses or do they live in units or semi-detached dwellings. What do people tend to live in? Because if you know that most people in an area live in 1-bedroom units you might want to start your search looking at 1-bedroom units because you know there’s a high demand for that in that area. However if you’re going potentially into a rural area, the chances that they are living in 1-bedroom units is probably pretty slim. Most people would probably be living in 3- or 4-bedroom detached homes.
So basically, what you want to look at is what property do I have, how many bedrooms and what type of property and what percentage of the populations is looking at living in that property because that’s going to affect how many potential renters you have for your property and it’s also going to affect how many potential people can buy your property. So look at the type of property and see if it matches up with the types of properties that people want to live in.
The third thing to look for is to get valuation estimates on the property. You can do this online but it’s not going to be 100% accurate but basically you just want to make sure that the property is not being completely overvalued, they’re asking for way too much for the property. The websites I recommend to look at valuation estimates is onthehouse.com.au. You can also get RP Data reports – they are about $40 I think, or there is a free method to get a limited RP data report absolutely free. And I share that in detail and how you can do that in episode 194. So go to onproperty.com.au/194 to get access to those details on how you can get that report for free. But OnTheHouse or RPData are going to be your best sources of valuations. So get evaluation done. Find out, is your property overvalued? Undervalued? What do you think about that?
The fourth thing to look for is to find out when was this property first listed. Often we think that we need to rush in and we need to offer a lot for this property in order to get it. But if we find out that this property is actually been sitting on the market for 6 months, well that changes the way we approach this property. If it’s been on the market for 6 months then how come no one has snapped it up? Well, chances are it’s probably overpriced or it has some sort of issue that you’re not aware of.
So knowing how long this property has been listed is a great way to look for things when you’re inspecting the property and also it would change your negotiation tactics. So the website that I recommend to find this stuff out is allthelistings.com.au. That will give you a listing history, doesn’t have it for all properties. There’s also a tool called ripehouse which has a much better history of listings but there is a pay toll. You can check that out by going to onproperty.com.au/house, h-o-u-s-e in order to see that tool.
The fifth thing you want to look for – and I’m on the home stretch now, just two more things to go, is the previously sold price and then you want to compare that to the growth trend. Again you can use the tool onthehouse.com.au and you can find out when was this property previously sold and for how much. This is public information that is available to you and if you know that this property was sold for a certain amount, let’s say, 5 or 10 years ago, well you can go and you can look at what has the growth rate been in the area over the last 5 or 10 years and what is the asking price for this property at the moment. If you can see that the growth rate has been 10% over 10 years and you can compare that to what the property sold for, you can do some calculations, the property’s probably worth about this much if I compare the previous sale price to the growth rate of the area.
Obviously you need to consider the fact that improvements may have been done on the property so if it’s been completely renovated or if there has been development or extensions put on the property, well then that’s going to basically make this step null and void. But if the property is pretty similar to what it was 10 years ago, then this is going to help you get the idea whether this property is overpriced or potentially undervalued.
The sixth thing to look for is simply the percentage of the median price of an area. You can find out the median price of an area which is basically the middle price of an area. So you’ve got expensive properties in an area, you’ve got cheap properties in an area and then you’ve got the median price which is going to fall about somewhere in the middle. And finding out what percentage of the median your property is an important step to know who you’re appealing to in the market when it comes on to rent or sell this property.
If you’re extremely over the median then you’re looking at a really expensive property in the suburb. Or if you’re extremely under the median then you’re looking at really cheap properties in the suburb. Generally people tend to look around that median area, that’s where most demand is going to be. So it’s just good to know am I extremely over or am I extremely under because that may affect demand for the property. You need to look at that in more detail.
So there you have 6 things to look for for researching the area. You’ve got 6 things to look for for researching the property itself. And again, research, research, research! If you want to know which property to buy then you need to do your research. You need to understand your financial goals. You need to avoid those big unseen expenses. You need to project ahead – both for your own life and the property. You need to do your research. Go into the property. Do your research so you can understand whether or not this property is going to move you toward your financial goals or is it actually going to move you away from your financial goals.
So I hope that this has been helpful answering how do I know which property to buy.
I’m Ryan McLean from onproperty.com.au. If you’re interested in investing in positive cash flow property then I do have a free report that you can get access to where I show you 10 real positive cash flow property listings. These are properties with high rental yields that are highly likely to generate a positive cash flow. They’re located in all different areas of Australia including capital cities. You can check that out for free by going to onproperty.com.au/free and you can get that report over there.
And so I hope that you enjoyed this video. I hope that you enjoy that report and until next time. Stay positive.