I’m going to confess that I can get lost in demographic information for hours. I love it! I really find it an interesting challenge to be able to work out what a typical household looks like and translate that into what a typical property suited to that tenant should look like.
We know the median for an area and together with what we know from researching real estate sales websites, we also have an idea about what that typical property looks like (for example, a three-bedroom weatherboard house or a two-bedroom brick house).
Now let’s take it a step further. Many of the real estate sales websites offer suburb profiles (or similar information). The information produced in the suburb profiles is sourced from the Australian Bureau of Statistics (that is, census data) and gives you an idea about what a suburb or town looks like.
Let’s assume I have never been to postcode 2032 in Sydney. Have a look at the demographic information in the table below and tell me what strikes you about what you see.
Here’s what strikes me about this specific example (this should help you to apply this type of thinking to your selected suburbs):
Nationality: A high proportion of residents in the area are of Indonesian, Chinese and Greek nationality. So, I may start making some general notes on what type of accommodation these nationalities could prefer. For example, I would heighten my attention on units for the Asian population, so I would note down to keep that in mind.
Age of the population: This tells me that, compared to the rest of Sydney, a large proportion of the population is in the 20- to 39-year-old age group. I would start wondering if I was near a tertiary learning institution such as a university. This might also fit with the nationality data. If I found a high proportion of school-age children, I would note down that I want to know where the schools are located with respect to any property I am considering, and if I wanted to be more thorough, I would look at the My School website at <www.myschool.edu.au> and see which schools in the area are better than others.
Marital status: The demographic tells me that there is a large percentage – 46% in fact – of single people living in the area. Now I might start thinking that university accommodation is something I need to consider if I’m going to invest here. Also, I might consider one- or two-bedroom accommodation for students, not five-bedroom houses.
Education: Wow! Almost four times as many people in this suburb are at university than in all of Sydney. This information is really starting to indicate some important criteria to consider when looking at purchasing an investment property in this area.
Transport to work: This data informs me that compared with all the people in Sydney, five times as many people in this suburb travel on public transport. So, straight away, I start thinking that a garage may not be that important. However, I would want the property I buy to be within 300 metres of the bus or train station.
Type of dwelling: Just to confirm my suspicions, a large proportion of the population of this area lives in units or semis, so that is the typical type of property for most people in the area.
Nature of occupancy: And just in case I missed it completely, this information tells me that a very large proportion of individuals in this area are renting. As an investor, I know this means that people want to live here. From what I have learned above, I know that they need to live here because it is close to a university or other tertiary learning institution.
So, what have I learned about this postcode? I know that most people rent units and semis and catch public transport, and a large proportion are single and may be from overseas. Now that I have a picture of what my potential tenant looks like, I can start working out what kind of property I need; that is, a two-bedroom unit or semi without a carport or garage that is within walking distance of either the university or public transport. In addition, I may even consider a furnished property geared towards overseas students as I could then charge a higher rent and convert a property within my price range into a rental property that offers higher than normal yield for that area.
You may be wondering why I would look at a two-bedroom unit for a single person. Well, often people who want to live alone also want an office. Also, I am minimising my risk by having a two-bedroom unit as I not only cater for my target market – that is, people living alone – but also couples, flatmates or even a family with one child. Remember plan B: always anticipate the potential risk and minimise it. All the information is there; you just need to interpret it.
At one stage after moving from Melbourne to Sydney, when both my husband and I were looking at buying a property, we had our list of three suburbs each. Unfortunately our buying criteria and purchase prices differed. So on Saturdays we had what amounted to a military campaign of inspections involving flying across the Sydney Harbour Bridge and paying its tolls at least five times to cover Maroubra, Manly, Mosman, Newtown, Balmain and Bondi.
We still managed to see more than 10 properties a day but as you can imagine we only spent on average seven minutes at each property. (Incidentally, that’s about the same amount of time a bank-organised valuer will spend at your property.) Once you know what you’re looking for… well, you know what you’re looking for. With five minutes for some inspections you can imagine how important a checklist becomes for recording what you see, even as a mental trigger of what to look for.
Knowledge is power and it is the foundation of sound decision-making. For instance, if you’re looking at a property to turn over and sell quickly in an area where most people rent, you’re probably barking up the wrong tree.
Remember that more than 65% of properties are owner occupied so if you are looking at an area that has a high proportion of renters you may find that a quick flip can be difficult if you are targeting investors, as you have already extracted the value. For a flipping strategy you may be better to target areas with higher proportions of owner occupiers who want the dream house now.
Conversely, this might be an area where other investors want to buy, so knowing who is your future potential buyer is also important. That way, as a fallback plan, if you need to sell quickly you want your property to be attractive to the largest market available. If the area has a high proportion of renters, then investors will also be interested in buying your property. The key is to make the property attractive to the largest proportion of the market possible. If you’re looking for units in areas where there is a high percentage of families, you may end up with empty units. Not a good idea. Minimise your risk by ensuring your property matches what the majority require in a property. For instance, if the suburb has a high proportion of single people, don’t buy a one-bedroom unit as only single people, first home buyers or couples can live there.
Buy a two-bedroom unit so you also get the additional market of the young family, the shared accommodation and maybe even downgraders (that is, retiring baby boomers). So, getting to know the people who live in the suburbs you’re considering will help you narrow down your search, sometimes right down to the street you want to buy on.
The best way to make solid investment decisions is to get to know the suburbs or towns you’ve selected. We’re really narrowing things down. Targeting areas that are likely to soon suffer economic downturns is not a good decision, but neither is following the crowd and purchasing in an area just because everyone else is. Make sure that the suburbs you’re considering are going to grow in population, in demand, economically, and so on. Do the research. This leads us to every property investor’s best friend: the internet.
You will be able to find 80% of what you want to know about a suburb on the internet and you don’t have to pay a fortune for it either. Over the past 10 years, I have collated more than 30 websites that I use to gather information and assess an area. This enables me to drill down and find a specific property. All of these sites are free.
Toolbox tip #1: People will interpret information differently. At the end of the day the numbers don’t lie. Bernard Salt from KPMG is one of Australia’s most well known commentators on demographics. In fact, he has written many books on the topic. To learn how to start reading the numbers check out some of his articles. He has a number of best-selling books and writes for The Australian.
Toolbox tip #2: Sign up for Google Alerts for your suburbs and towns. As soon as there is mention of your area, for instance that a new highway to bypass this town is being built or new train line to connect this suburb is planned, you can be on top of drivers of population and capital growth. Highway bypasses have killed off many small towns throughout Australia.
Toolbox tip #3: Be sure to vary your property locations as your portfolio increases. This will give you exposure to different stages of the market. For example, as Perth goes up in value, the Sydney market may be decreasing in value, so you may be able to access equity from the Perth property to grow your portfolio. But remember to be aware of your properties being cross-collateralised as this can prevent you from being able to access any capital gain. If you are cross-collateralised, lenders will look at your entire asset value, so if your Sydney property has a lower value and your Perth property a higher value, the overall value may not have changed and the lender sees no new equity for you to access. However, if the properties are viewed separately you could access the equity from the Perth property without the value of the Sydney property ever being an issue.
Toolbox tip #4: When searching on a real estate sales site, enter a price range 10 to 20% above and below your median price as you may be able to negotiate down or there may be some already heavily reduced properties that meet your criteria. Hence, if your median is $300 000, search for properties priced between $240,000 and $360,000. If you have decided on a renovation-and-sell strategy, you may have to buy closer to the $200,000 price mark (when you back-calculate your numbers) to make a decent return. (Check out part III of the book if this is what you are planning to do.)
This is an extract from Jane Slack-Smith's new book Your Property Success with Renovation published by John Wiley & Sons.