One of the most important skills a property investor can develop is the ability to analyse a marketplace.
Not only do you need to understand where to buy, but you need to know what type of investment property will deliver the results you need.
Essentially there are six macro drivers of a marketplace. Each of these factors work together to influence a suburb’s growth.
When governments and private enterprise are investing into an area it’s a good sign that economic growth is happening
Pay attention to media reports of government and industry activity in the area. Look for areas with large infrastructure projects which have been approved – and funded – not just talked about.
Is unemployment low? Higher wages combined with low unemployment means that your investment property’s target demographic has more discretionary income.
Typically, property values follow income growth so look for areas of increasing business activity. Give high unemployment areas a miss – your investment property yields are unlikely to grow in such locations.
Demographics can tell you a lot about the individuals living in a particular location.
Information such as income, age and family status can tell property investors a lot about their prospective tenants.
For example, the spending habits and needs of a young family with children will vary greatly to that of professionals in the prime of their careers or individuals preparing for retirement.
Obviously then, each person’s individual preferences and their needs will play a part in both the location and kinds of properties they’re looking for.
Use this knowledge to find the right investment property for both your prospective tenant and your portfolio.
Supply and demand
Capital growth is directly impacted by the state of supply and demand in a particular location.
When there are more buyers than homes, values rise; and of course the inverse is true…the more homes than buyers in a suburb will see home values drop.
Bottom line, look for highly desired areas with a limited release of land and a growing population.
This puts pressure on the existing supply and drives up your investment property yields.
You’ll want to find locations where yields are strong; preferably at least 6%.
Look at the history of the suburb…if you’re seeing consistent growth; for example 2.5% growth each quarter (totalling 1 0% per annum) then you’ve found a marketplace on the increase.
Typically this kind of growth can last anywhere from one to three years, so you can’t muck about in analysis paralysis…you’ll miss the boat!
As more individuals move into the area, pressure is placed on the available housing, leading to an increase in property prices if supply is limited.
While a growing population is a great driver of property prices, that doesn’t always mean that if you bought an investment property in areas where the population is growing that you’d see capital growth.
The other side of that coin is supply. If the suburb has a lot of land available for release, it significantly reduces any potential for capital growth.
What to look for
Publicly listed property companies
Take advantage of the thousands of dollars large companies spend in market research. Look for movement from companies (e.g. New World ) into growth locations.
These companies are in the business to make money…they don’t open up new stores or expand existing ones for nothing…they’ve researched the area and believe it can support their expansion.
Another benefit of these companies’ activities is that it impacts the supply and demand of housing in the marketplace; as people move into the area to fill job openings, they contribute to the local economy, leading to gentrification of not only that particular suburb, but of surrounding areas as well.
Look for locations with a diverse range of businesses. You don’t want to buy in an area where everyone is employed at a single industry; that’s simply a disaster waiting to happen.
Finally, study the marketplace demographics to get a good idea of the synergism that exists in that particular location.
Synergism involves the unique interaction between people and where they live that combines to create a certain “atmosphere”.
When buying an investment property you can use your understanding of a market’s synergy to choose a property that holds the potential for offering the best returns.
For example, consider what type of home a population with a large number of families with young children would be looking for, compared to one where the majority demographic is one with individuals who are either in or nearing retirement.
A three bedroom home would rent much less quickly in an area where the majority of the populace is wanting to downsize than it would in a location with a large percentage of families.
If you’re interested in investing in property, register to attend our next Property Investor Night.
At these FREE events held all across the country we discuss where the growth markets are right now, and share ways you can navigate your way to financial freedom through investing in property.
Seats fill up fast, so book yours now!
Positive Real Estate NZ