“Location is non-negotiable”: Nine ways to outperform slow property markets
Friday, November 16, 2018/
What goes up must come down, which is true of some of our property markets at present.
Now that doesn’t mean they’ll come down with a bang — rather, more of a whimper, that some might mistake for a bust.
The Sydney and Melbourne property markets have experienced significant price growth over the past few years, and have now moved to the next stage of the property cycle where the value of most properties are falling.
And that’s not necessarily a bad thing.
Why do I say that?
Well, a rising tide lifts all ships — and it can also give uneducated investors an over-inflated sense of their own ability.
It’s when markets are softer that sound investment strategy will win the day and will also produce solid results regardless of the state of the market.
There are multiple property markets in Australia, each defined by geographic location, price point and type of property — all all of these markets are at different stages of the property cycle.
So let’s look at nine ways you can outperform a slow property market.
1. Outperform the averages
Here’s the thing: you are not buying the market, but a particular property in the market.
What I mean is sophisticated investors buy properties that will outperform the averages.
And those types of properties are ones I call ‘investment grade’.
Investment-grade properties are ones that offer a level of scarcity, in locations with multiple growth drivers that will always be in strong demand from owner-occupiers, who drive up prices because they buy emotionally.
2. Don’t try to outsmart the market
Too many novice investors try to outsmart the market by buying in areas they believe will perform well at some stage in the future.
These locations are often the affordable ones on the outskirts of the city, which they mistakenly think will one day be worth millions.
But they’re wrong.
While all segments of the market tend to do well in an upswing — unless there’s an oversupply — during softer market conditions it is these affordable areas that are most likely to suffer, especially as interest rates increase.
The same can be said for prestige locations, which are often debt-laden and very sensitive to rate rises. There is also a lack of buyers who can afford these types of properties.
3. Inner- and middle-ring wins the race
In my experience, it is the inner- and middle-ring suburbs of our major capital cities that remain resilient — and even bolshy — in the face of soft market conditions.
That’s because there is always strong demand to live in these areas by people who have the financial means to do so.
As long as they have good jobs, and there’s no sign our employment sector is wavering, they will desire to upgrade to a more premier or gentrifying suburb with many lifestyle attributes.
And they’re prepared to pay to achieve their property goals.
During the boom times, the ripple effect caused price growth to ripple to the outer suburbs.
Now the reverse is happening, with home buyers and investors only choosing quality properties. This reverse ripple effect is seeing investment-grade properties in our inner- and middle-ring suburbs holding their own.
4. Free advice isn’t free
Everyone likes free stuff, don’t they?
But free investment advice is rarely free — in fact, it often comes with a hefty learning fee.
In a market upswing, you’ll see many ‘advisers’ offering insider intel on particular properties.
What they don’t tell you is they’re usually getting paid a commission to spruik it to you.
When a market is flat, that is the time to get solid advice from people who have invested successfully in multiple market cycles. Not someone who happened to make some money during the latest Sydney boom, because everyone did, including the investors who didn’t know what they were doing.
5. The horizon matters
I’ve said it before, successful property investment takes a long time.
In fact, the power of compounding only really starts to show its true colours after 10 or more years.
That’s why it’s so important to develop a long-term investment strategy that will help you reach your goals.
It’s equally important you develop the ability to ignore short-term market fluctuations.
Just because a market is experiencing a downturn doesn’t mean you should sell up before you ‘lose it all’.
No, what you should do is ignore it and keep your eyes firmly on the horizon, which evens almost everything out in the end.
6. Select an investment-grade property
Over my decades of investing successfully, I’ve developed strategies which ensure I only buy investment-grade properties for myself and my clients.
Here are two strategic approaches.
A top-down strategic approach
- Buy at the right stage of the property cycle. Look at the big picture. How is the economy performing and where are we at in the property cycle?
- Look for the right state in which to invest — one that is in the right stage of its own property cycle. Only invest in capital cities, as that’s where the bulk of economic growth and population growth will occur. I don’t try and fight the big trends.
- Within the state you choose, look for the right suburb — one with a long history of outperforming averages. I’ve found some suburbs have 50% to 100% more capital growth than others over a 10-year period. Obviously those are the suburbs I target. In general, these are suburbs where the locals have higher disposable incomes, or locations going through gentrification.
- Once my research shows me the suburb to explore, I then look for the right location within that suburb.
- Then within that location, I look for the right property, using my six-stranded strategic approach.
- And finally, I look for the right price. I’m not looking for a ‘cheap’ property (there will always be cheap properties in secondary locations). I’m looking for the right property at a good price.
A six-stranded strategic approach
- The home appeals to owner-occupiers. Not because you should plan to sell the property, but because owner-occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish.
- The home is below intrinsic value. This is why I would avoid new and off-the-plan properties which come at a premium price.
- There is a high land-to-asset ratio. This doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
- The house is in an area with a long history of strong capital growth, which will continue to outperform the averages because of the demographics in the area as mentioned above.
- It has a twist — something unique, special, different or scarce about the property.
- You will be able to manufacture capital growth through refurbishment, renovations or redevelopment, rather than waiting for the market to deliver capital growth.
7. Location is non-negotiable
One of the most interesting things about successful property investment is it doesn’t have to be exciting.
What I mean is there are tried, true and tested fundamentals you can rely on to deliver capital growth.
One of the most important factors is location because it will always determine your property’s performance.
Why would you try to hotspot the next up-and-coming location, when there are literally hundreds of capital city suburbs that continue to outperform the averages?
Don’t look for what might work in the future, instead, only invest in what’s always worked. In other words, investment-grade properties in proven locations.
Never compromise on location. It really is as simple as that.
8. Know your finances
Far too many Australians become investors by chance and don’t have the correct ownership or finance structures to underpin their portfolios.
Instead, smart investors begin their investment journey with their eyes open and with a clear financial structure to see them through the ups and downs of market cycles.
One of their most important tools is a financial buffer, perhaps via a line of credit, which can keep their cashflow flowing during any rainy days they may encounter during their journey.
9. Never set and forget
Another bugbear I have is the term ‘set and forget’.
Successful property investment is never something you should just forget about.
In fact, the very best investors regularly review and assess their portfolios annually to evaluate financial performance.
One question I regularly suggest you ask yourself is: ‘If I knew then what I know now, would I have bought that property?’
If the answer is no, it may be time to jettison any under-performing assets so you can buy investment-grade properties instead.
There’s no point hanging on to a property that is dragging your financial future down.
The bottom line
By now I hope you’ve realised successful property investment doesn’t really have much to do with the market at all.
By following a proven strategy that helps you identify investment-grade properties in inner- and middle-ring city suburbs you can regularly outperform the averages.
That way you’re not relying on a market upswing to make money because your well-selected properties will be doing that for you — even when the wider market is struggling.