3 Indicators Pro Investors Look For.
Ever wondered what professional property investors and buyer’s agents look for when analyzing the viability of a suburb and property? There is no “special sauce” and no one has a “crystal ball” but you can look for data which has historically indicated future price growth. Below are some basic indicators that are easily available to anybody willing to look.
Vacancy Rates
These are a game changer when fully understood. Vacancy rates indicate the amount of available rental properties in the area. A tighter vacancy rate indicates demand for housing whilst a higher rate can indicate an oversupply. These are often expressed as a percentage and can be found via numerous sources. My go to website is SQM Research. As a very general rule of thumb:
3% indicates a balanced market
Greater than 3% is an oversupplied market
Less than 3% is a tight market
When we consider price growth almost always returns to the basic fundamental of “supply and demand” we can see why these can be an excellent tool. Falls in vacancy rates can indicate a large influx of people moving to an area where housing supply struggles to keep up. This puts pressure on rents resulting in price rises in both rents and house prices. More people also look to buy rather than rent. It’s also important to look at the overall trend. If these rates are falling sharply this may indicate a large increase in demand and vice versa. In the past I seen markets fall from high rates to sub 3% over a short period and solid capital growth has followed.
Land to Asset Ratio
Land to asset ratio relates to the underlying land value of a property as a percentage of the overall price. In simpler terms – How much is the piece of dirt worth that the house sits on? We need to remember that predominantly Land appreciates in value while buildings depreciate. Therefore, it is important to buy something with more of the stuff that goes UP rather than the stuff that goes DOWN! Pro investors and buyer’s agents target a minimum 60-70% land value in a property. To look at an example say a property has a purchase price of $500k a pro investor would like to see a land value of $300-$350k minimum. That way the odds are stacked in the investors favor that overall, the price will go up rather than down. This is a fundamental reason why we see brand new housing in the outer suburbs lose value or underperform. Houses are built for $350k on a $150k block of land. The exact opposite of what should be targeted. The building depreciates faster than the land component is appreciating and the overall property falls in value or remains low. Land values can be tricky to find and calculate. Most council or government websites publish land values for land tax and rate purposes. This is often a good start along with comparable sales.
Owner occupier ratio
Finally, a good indicator of future price growth is the ratio of owner occupiers (OO) in the suburb. Predominantly, owner occupier dominated suburbs result in greater capital growth. OO are more likely to perform renovations, upgrades and value ads to their properties which drag values of other properties in the area up. OO dominated suburbs are also more tightly held than rental dominated areas. The suburbs are less transient and have an underlying community “feel”. People want to live there and will pay a higher price to do so. A higher portion of renters may also indicate an underlying issue with the area. Are they only there for a short period? Ie. Employment, etc. Ratios can be found via census stats published on the ABS or other investor sources like microburbs, SQM research or corelogic. A good rule of thumb to target is no greather than 30% rental population.
- The Tattooed Investor