Investing in real estate is a complex journey that involves careful planning, thorough research, and a keen understanding of various factors that influence the property market. To simplify this process and increase the likelihood of successful investments, we at Rising Returns have developed a comprehensive 72-step methodology. Our approach is grounded in both qualitative and quantitative metrics, ranging from macroeconomic trends to minute local factors. This comprehensive guide aims to illuminate the multifaceted factors we consider when identifying prime investment properties, in the hope that it may aid you in your own real estate ventures.
CONSIDERATIONS
Supply vs Demand
- Factors influencing demand: Migration patterns, infrastructure development, lifestyle attractiveness, job availability, and mobility of residents.
- Factors driving confidence: Media coverage, word-of-mouth influence, political climate, safety levels, and quality of education.
- Factors contributing to low supply: Limited building approvals, scarcity of large lots for subdivision.
NATIONAL FACTORS
1. Government Incentives
Tax credits, deductions, subsidies (like First home buyer grants, builder grants etc.) can reveal temporary increases in demand and potential misleading trends.
2. Interest Rates
Reduction in home loan interest rates makes homeownership affordable, inflating property prices. Conversely, when the Reserve Bank of Australia (RBA) increases rates, mortgages become less affordable.
3. The Economy
Unemployment rates, wage levels, GDP, price levels, population growth, and the value of the Australian dollar all influence purchasing power and consequently, home buying capacity.
4. Overseas Buyers
Influx of foreign buyers can elevate property prices.
5. Capital Gains Tax
Changes in CGT can stimulate investment and capital reallocation, thus impacting the property market significantly in the long run.
6. Council Activities
Future-focused development approvals for specific suburbs/areas can stimulate growth. Local developments, including roadwork, transportation improvements, corporate development, and new amenities, can enhance the attractiveness of a region.
7. Catchment Zones and Zoning Classifications
Ideal locations are those outside flood and bushfire zones but with extensive landscaping overlays. Such areas are attractive for owner-occupiers and located within the catchment area of high-performing public schools.
8. Diverse Growth Factors
In the long run, property prices can be affected by the diversity of local economic drivers.
9. Suburbs with Higher Number of Owners Occupiers
Suburbs with over 65% of owner-occupiers show good potential for growth.
10. Suburbs with Lower Vacancy Rates
Target markets with less than 2% of vacancy rates. Vacancy rates over 3% are undesirable, while anything below 1% indicates a rental market in the landlord’s favour.
11. Suburbs With High Rental Yields
High rental yields indicate robust rental returns for properties in the area.
A $400k property that rents for $400pwk = a 5.2% rental yield. The higher the yield the better the investment. There is no one-size-fits-all when it comes to yield. If you are looking to purchase a property with a 6% yield you need to be looking at markets that have an average of around 5% or greater.
12. Historical Growth Trends of Suburbs/Area
Indicators to be aware of:
- 3-month growth rate
- 6-month growth rate
- 12-month growth rate
- 24-month growth rate
- 5-year growth rate
- 10-year growth rate
Markets with robust growth over the past 5-10 years might start to slow down or plateau.
13. Inventory Levels
Inventory measures the stock supply in a market in terms of months, calculated from the ratio of average listings to average monthly sales. The resulting figure indicates market dynamics: 0-2.99 months implies a strong seller’s market, 3-4.99 a seller’s market, 5-6.99 a balanced market, 7-8.99 a buyer’s market, and over 9 a strong buyer’s market. Suburbs with fewer than 3 listings should consider adjacent areas or the Sa3 region for a more accurate assessment.
14. Median Rents
Median rent fluctuations can signal shifts in rental demand within a Local Government Area (LGA). A rise in rental yield doesn’t always imply that rents are growing in a particular suburb. In fact, if the median property price decreases, the rental yield would naturally increase. Consequently, always consider median rents for a more accurate understanding of the rental market’s state.
15. Supply Vs Demand Is Based Off
- Building Approvals
- Number of Existing Dwelling
- Total Sale Listings
- Inventory Levels
16. Number Of New Listings (CoreLogic/SQM)
SQM is a prime resource for acquiring pertinent real estate information. Consider examining the history of new listings—a surge signifies a potential imbalance between demand and supply. Such a trend may stem from various factors, including:
- The unveiling of new property developments.
- Limited job opportunities in the area.
- An oversupply of housing units or apartments.
- Alterations in governmental policies.
17. Unemployment Rate
If an LGA’s unemployment rate is lower than the state average, it signifies a thriving economy. For example, a 7% rate in a region you’re researching, compared to Queensland’s 11%, suggests economic vibrancy.
18. Household Income
Household income data, derived from suburb or Local Government Area (LGA) level, offers insights into the average earnings per household. Elevated income levels in a particular suburb often point to the presence of wealthier families or individuals in that area.
19. Economic Drivers
Understanding the key industries driving an economy is vital. Ideally, you want more than five major industries, each exceeding the state average, for economic robustness. Resources like www.home.id.com.au/demographic-resources or www.abs.gov.au are excellent for this information.
20. Retail Trade Annual Growth
Retail trade turnover, reflecting consumer confidence and economic vitality, is a key indicator. Its growth suggests heightened consumer trust and more circulating money. Although not accessible at local levels, this data, representing annual percentage changes for Queensland, is updated monthly.
21. Jobs Growth
This metric provides annual job estimates within a local area, originating from the National Economics microsimulation model. It’s typically higher than Census figures due to annual updates and absence of Census undercount. The model draws from the ABS labour force survey.
22. Housing Supply
To assess the supply vs demand in a region, track the change in sales listings over the past 12 months. Calculate the ‘market tightness ratio’ by dividing the number of last month’s listings by the total listings over the past year. For example, 7 listings in a month out of 152 in the past 12 months gives a tight market ratio of 0.04%.
23. Job Advertisements
To gauge the employment landscape in a particular region or city, count the number of job advertisements. Websites like SEEK, Jora, or Indeed provide an excellent snapshot of job availability in the region.
24. Airport Passenger Growth
Assess the average growth in passenger numbers for each state or city over the past four years to identify trends in internal arrivals. Consistent annual increases may suggest:
- A rise in city population
- Growing tourism
- An increase in familial or friend visits
- Enhanced business travel activity
25. Rental Supply
Ideally, one should observe a consistent decline in rental supply over time. This contraction in rental listings indicates mounting pressure on the rental market, which typically leads to a rise in rental prices due to scarcity.
26. Industries of Employment
Employment (total) provides a precise and current count of people working in a specific area. NIEIR models these statistics to adjust for any under-reporting of jobs in the Census data. They calculate the total workforce, including both full-time and part-time employees in various industry sectors, irrespective of their residence. These figures are updated yearly for accuracy.
27. Average Age
A market’s stability is often reflected by a dominant middle to elder age demographic in the region. The average age of inhabitants can provide insights into market steadiness. It allows you to discern if a location primarily houses an older population, potentially indicating a significant retiree presence. Ideally, a dominant age bracket of 30-55 years suggests a robust contribution to the local employment economy.
28. Project Pipeline
Understanding the forthcoming pipeline of infrastructure projects can shed light on future economic and environmental contributions. Evaluating council development application (DA) approvals can also serve as a reliable gauge of anticipated regional growth and transformation.
29. Imports & Exports Goods
A robust economy often hinges on its productivity. Monitoring the trajectory of goods’ imports and exports over time can provide insights into whether the economy is in an expansion or contraction phase, making it a critical economic indicator.
30. Internal Migration
Internal migration, the relocation of people within Australia’s specified boundaries, significantly impacts the property market. This movement, whether within a state, territory, or city, alters the demographic composition and demand in areas. Hence, it’s not overseas population growth but internal population growth that predominantly influences the property market dynamics.
31. Hip Score Card
This is a useful tool for gauging the characteristics of an area, such as its hipness, family-friendliness, community strength, and affluence. This tool provides valuable insights into the neighbourhood’s attributes and lifestyle potential.
32. Weekly Rental Listings (SQM)
By examining the historical trends of rental listings in a region, you can assess rental market conditions. A lower number of listings signifies a higher demand for rental properties, indicating a tight market.
33. Value Add
The ‘value added by industry’ metric reflects the productivity of various sectors within the area. It measures the capacity of each sector to augment the value of its inputs. Compared to output (total gross revenue), which may be high but can necessitate substantial input costs, this metric provides a more nuanced understanding of an industry’s efficiency.
34. Price Segments
The average housing prices in the LGA can offer insight into the local real estate market’s trends. For instance, if 60% of properties sell between $600,000 and $800,000, it reflects the prevalent price range in that area.
35. Land To Asset Ratio
The land-to-asset ratio measures the value of the land as a percentage of the total property value. So, if a property costs $1 million and the land it sits on is valued at $500,000, the land-to-asset ratio would be 50%.
36. LGA GRP Ratio
Gross Regional Product (GRP) quantifies the net wealth created by the local economy. Variations over time can reflect shifts in employment, productivity, or industry types within the area. Local Industry GRP represents the economic value generated by local workers, regardless of their residence, after taxes and dividends are deducted. It essentially measures the GRP produced by local industries.
37. Local Job vs Employed Residents
The metric of Local Jobs vs Employed Residents, available on platforms like www.profile.id.com.au, should ideally show more local jobs than employed residents in an LGA. This indicates a surplus of job opportunities for the community.
38. Nearby Suburbs With Strong Growth (‘Ripple Effect’)
When property prices surge in a particular suburb, people often migrate to adjacent, more affordable suburbs, thereby escalating prices there. This is known as the flow effect within an LGA. However, it’s essential to remember that a boom in one suburb doesn’t imply a similar trend across the entire LGA. By tracking this metric, you can effectively predict the growth phases of different suburbs.
39. Online Listing Demand
Online listings can serve as an effective indicator of market demand. The higher the number of listings, the more interest there is in a particular region. Ideally, you should observe a growing demand in online listings. You can obtain this data from the Suburb Finder website. A designation of ‘HIGH DEMAND’ is a promising sign of substantial market interest.
40. Days on Market (DOM)
The Days on Market (DOM) metric – the time a property stays listed before being sold – can reflect area growth and demand. In a balanced market, DOM should typically range between 85-100 days. Lower DOM counts often indicate growth areas with high demand. This countdown starts once a property is listed and concludes when the seller accepts an offer and signs the contract.
41. Average Household Size
The average household size can provide insights into the most sought-after dwelling type in an LGA. For example, an average household size of 2.8 indicates that 3-bedroom houses are likely to be in high demand. Always round the number up for the most accurate insight.
42. Vendor’s Discount
The vendor discount, calculated by subtracting the actual sale price from the asking price of properties in a suburb and then dividing it by the asking price, times 100, reflects the market’s dynamics. A vendor discount below 5% suggests a seller’s market, characterized by high demand and growth potential.
43. Auction Clearance Rate (ACR)
The Auction Clearance Rate (ACR), calculated as the percentage of properties sold at auction against the total number presented each week, offers insights into market conditions. An ACR above 60% points to a seller’s market with high demand and growth prospects.
44. Stock on the Market (SOM)
The Stock-On-Market (SOM) ratio, calculated as the percentage of properties listed in a suburb against the suburb’s total properties, gives an idea about the market supply. An SOM around 1% or lower is desirable as it signals less supply, whereas anything over 3% points to oversupply.
Developers, though necessary, can impact property investors negatively by introducing excessive supply and potentially suppressing growth potential. For example, they may market a complex of 48 units, but listing sites might display only representative one-bedroom, two-bedroom, and penthouse units. Be aware that the actual supply might be more significant than what is shown.
45. Communication Score
The presence of high-speed internet connectivity, such as Broadband, NBN, ADSL, or Cable, is a crucial factor to consider when assessing a location’s desirability. This is especially significant when purchasing properties in regional or rural areas. To retrieve this data, websites like www.microburbs.com.au can be a valuable resource.
46. Online Search Interest (OSI)
This is a key metric that quantifies the level of interest in properties within a specific area. It is computed as the ratio of the number of online searches for property (on platforms such as www.realestate.com.au or www.domain.com.au) to the number of properties available for sale in the same area. An OSI above 40 typically signifies a healthy level of online interest in the region.
47. Potential For Renovations Or Development
A property with potential for renovation can be highly appealing to an investor. If there’s room for enhancements, such as adding a pool, an additional bedroom, or even an extra level, it can significantly increase the property’s appeal and value, making it an attractive investment opportunity.
48. Monthly Mortgage Repayments Vs Household Income
The Mortgage Stress Threshold, often referred to as the 30% rule, is a key financial guideline for real estate investment. It implies that housing expenses, which include rent, mortgage repayments, or other related costs, should not exceed 30% of the total household income. By adhering to this benchmark, you can identify areas where residents are more financially stable and, therefore, areas that present good investment opportunities due to their sustainable housing market.
49. Population Size
While there’s no absolute rule concerning the optimal population size for investment, it’s generally advisable to target Local Government Areas (LGAs) with a population between 15,000 to 30,000. Not only does this range typically indicate a thriving community with a robust local economy, but it also ensures enough reliable data for informed investment decisions.
50. Good Lifestyle Area
Investors should consider areas that offer a high quality of life, avoiding regions close to undesirable features such as jails, power plants, airports, or waste dump sites. It’s equally crucial to steer clear of locations associated with low socio-economic conditions.
Safety is a paramount concern. Areas with lower crime rates tend to be more attractive to potential tenants and homebuyers.
Lastly, accessibility plays a crucial role in property investment decisions. Look for areas with efficient transportation links to the city center, whether by car, bicycle, foot, or public transit. The easier the commute, the more appealing the location typically is to residents, which can positively influence property values.
51. Building Approval Pipeline
- Review the number of building approvals over the past 18 months.
- Calculate this as a percentage against the existing houses in the region. This provides insight into possible shifts in supply.
- Compare the average number of monthly building approvals to the average monthly sales volume to understand market dynamics.
- Areas with fewer building approvals in the pipeline pose less risk of incoming supply overwhelming demand, which can stabilize or even increase property values.
- As an investor, lower building approval rates can signal more favorable conditions for investment.
52. Suburb Demographics
a) Demographics: Consider factors like median age, ethnic composition, gender distribution, average income, migration trends, population growth, and total population to discern the likely target market for renters. For instance, if a suburb has an older median age but shows increases in population and average income, this could suggest the suburb is undergoing growth.
Property Type Demand: The types of properties in high demand can vary based on the area’s demographic profile. In suburban regions dominated by families, three and four-bedroom houses might be more desirable. Conversely, in central business districts, one and two-bedroom apartments might be more sought after by workers and students.
Population Growth Potential: Areas with potential for significant population growth can lead to an enduring shortage of properties, fostering an environment conducive to property investment. An upward trend in population often correlates with increased demand for housing, pushing property values higher.
b) Gentrification Indicators: The influx of wealthier residents into a suburb often signals a potential boom in the area. Common signs of gentrification include:
- Upgrades in local amenities: The rise in quality cafes, restaurants, and shops in the neighbourhood indicates an increase in the spending power of residents.
- Home renovations: A noticeable uptick in home improvements and renovations often points to an elevated interest in property value enhancement.
- High-end vehicles: A prevalence of luxury cars parked in driveways can suggest an increase in the affluence of residents.
- Demographic shift: A growing number of young, high-income residents can serve as a strong indicator that the suburb is undergoing gentrification.
- Each of these signs could signal an attractive investment opportunity, as property values often rise in areas experiencing gentrification.
LOCAL INFLUENCES
53. Street Tree Impact
Street trees can significantly enhance property value. Evidence suggests that tree-lined streets could potentially boost median property prices by around $20,000. Such a verdant setting not only adds aesthetic appeal but also signals a well-maintained and environmentally-conscious neighbourhood.
54. Public housing
Ensure that the suburb has less than 15%-20% of public housing. Too much public housing can affect the overall property market dynamics.
55. Google Earth View
Use Google Earth to examine the property’s surroundings. Assess the neighbouring properties and streets to get a sense of the area’s overall appeal.
56. Fully Owner Percentage
On average, 30% of housing in an LGA in Australia is owned outright, without a mortgage. A number higher than this indicates a stable LGA with lower volatility in price changes. Anything over 30% signifies a robust market.
57. Tenant Rate
The tenant rate shows the ratio of dwellings owned with a mortgage. A higher number suggests greater market volatility. Aim for an LGA with a tenant rate of 40% or lower.
58. Renters
Ideally, the LGA should have no more than 40% and no less than 15% renters. The proportion of renters at the street level is an even more crucial factor.
59. Owner Occupiers
An LGA with 60%-80% owner-occupiers strikes a good balance. This range suggests potential for high property growth while also indicating an increasing rental market.
60. Location / Proximity of the Property to Key Amenities
- Retail Outlets: Proximity to shops or shopping centers.
- Educational Institutions: Closeness to schools.
- Natural Attractions: Accessibility to beaches and forest/park lands.
- Transportation: How near the property is to transport hubs.
- Recreational Facilities: Distance to recreational centres or hubs.
- Travel Infrastructure: Proximity to airports or ports.
PROPERTY-SPECIFIC FACTORS
61. Exterior Appeal
The external appearance of a property significantly influences its value. A well-maintained facade can greatly enhance a property’s value, whereas a rundown exterior can devalue it, despite the interior condition.
62. Property Features
In a balanced market, distinctive features can make a difference in the property’s price. These might include a renovated kitchen, energy-efficient appliances, or a well-designed outdoor space.
63. Storage Space
Adequate storage, such as a garage or a dedicated storage unit, can add significant value to the property, especially in apartments where space is at a premium. It can potentially increase value up to $8,000 per square meter.
64. Easement Review
It’s essential to ensure no property easements might hinder future development plans. An easement-free property is also more appealing to potential buyers. Information about easements can usually be found on local council websites.
65. Flood Zone Evaluation
Check if the property is located in a flood zone or has a history of flooding. This knowledge can affect insurance premiums and property value. This information is typically available on local council websites.
66. Zoning
Zoning categorization (low, medium, or high-density) impacts a property’s value. If a property is zoned for development with fewer restrictions, it can significantly boost its worth. Information about zoning can usually be found on local council websites.
67. Bushfire Zone Evaluation
Confirm whether the property is situated in a bushfire zone as this can lead to higher insurance premiums. This information is typically available on local council websites.
68. Flight Path Assessment
Avoid purchasing a property within a flight path overlay, as aircraft noise can deter prospective tenants and buyers. Information on flight paths can typically be found on local council websites.
69. Noise Corridor Assessment
Properties located within noise corridors, which experience high levels of noise from vehicles, people, trains, freeways, etc., can be less appealing to live in or buy. Information about noise corridors can usually be found on local council websites.
70. Sewerage Zone Check
Make sure there are no sewerage, stormwater, or water lines running through the property. These could cause problems in the future and may bring restrictions and complications if you decide to develop on the property. You can typically find this information on local council websites.
71. Insurance Policy Premium
Check the potential insurance premium for the property. Many people overlook this factor, and it can have a significant impact on your cash flow if the premium is high. To ensure you’re well-informed, obtain a free quote from an insurer as part of your due diligence.
72. Property Valuations
Investigate what similar properties in the area have sold for in the last 3-6 months to understand the property’s potential value. This information can be accessed through resources like CoreLogic if you’re a member, or alternatively through websites like www.realestate.com.au or www.domain.com.au. Aim to compare properties with:
- Similar characteristics to the property you’re looking at
- Comparable land size
- Similar exterior
- Comparable floor plan
Also, you can use www.locationscore.com.au for evaluating short-term capital growth potential. Enter the suburb you’re interested in to get an analysis of the area.
Conclusion
Navigating the labyrinth of real estate investment can be challenging, but the use of a systematic and comprehensive approach can dramatically increase the likelihood of a successful investment. This 72-step guide is the culmination of our years of experience and expertise in the property market. It’s designed to offer a holistic perspective of the investment process, examining each aspect meticulously. We believe that this guide, which has proven effective in our own practices, can serve as a valuable resource for both novice and seasoned investors alike. Remember, success in real estate investment doesn’t merely hinge on a single factor, but rather a compendium of interconnected elements that, when considered collectively, can provide a sound basis for investment decisions.
