Michael Yardney joins us today, as he details his 5 stranded approach to select the best property.
Kevin: Last week in my discussion with Michael Yardney, Michael was helping us make sense of the 2016 market – how you read it. Last week, Michael, you were kind enough to give us your top-down approach moving from macro to micro. That’s actually choosing the market, and we promised that this week, we’d come back and you’d help us choose the right property or work at how we can choose it. What is your approach there, Michael?
Michael: The reason behind this strategic approach is because not all properties make investment sense. In fact, the sort of property that I like is one that is appealing to owner-occupiers, which isn’t the way most people look at investments.
You see, I like the sort of property that owner-occupiers are going to buy, not that I plan to sell my property but because owner occupiers are going to buy properties similar to mine, pushing up local real estate values. This is going to be particularly important in 2016 when I see the percentage of investors likely to diminish. The first strand of my approach is a property that appeals to owner-occupiers.
The second one is I like to buy properties below their intrinsic value. That’s why I avoid buying new or off-the-plan properties that tend to come with a premium price. I’m looking for a property where the land value plus the replacement value is actually probably less than what I’m paying for it. Even in the top-heavy markets of Sydney and Melbourne, you can find those properties.
I then dig down further and I choose an area that has not only just had a long history of capital growth in the past but more importantly, one that is likely to continue to outperform the averages because of the demographics there.
I believe demographics are going to be the big driver of our property market, so I look for areas where there are more owner-occupiers and where owner-occupiers want to live because of lifestyle choices. Also, areas where locals are prepared to, but mostly can afford to, pay a premium because they’ve got higher disposable incomes. In general, these are the more affluent inner and middle ring suburbs of our capital cities.
The fourth strand to my five-stranded approach is I look for a property with a twist – something unique, something special, something different, something scarce about the property. That’s why I don’t go for those big monolith buildings where all the apartments are the same.
Finally, Kevin, I only like buying properties to which I can add value through renovations, through refurbishments, through redevelopments. I want to manufacture some capital growth rather than waiting for the market to deliver me capital growth.
By doing this, I minimize my risks and I maximize my upside, because each strand of my approach makes me money from property. Combining all five of them puts me ahead of the odds because to be honest, they’re not always all going to work, but it’s stood a good test of time over the years to help me grow my wealth and those of our clients.
Kevin: It would require a huge amount of discipline, too, to stick to that because I imagine you’d be actually knocking back a lot of properties because of that.
Michael: I used to say 5% of properties – only 5% – are investment grade, and I was wrong. In the last year or two, I’d say it’s probably more like 1% are what I call investment grade. I think this year, we’re going to have to be even more selective.
It involves a lot of time, a lot of research, a lot of due diligence. But I do that for us, personally, for Pam and myself, and we do it for our clients. I actually piggyback on all of the research Metropole does for other people and I use it to my benefit, too, Kevin.
Kevin: Of those five, are there any of those that are negotiable?
Michael: I think when you buy a property, there are three things. There is your budget, and the budget really is usually determined by other factors – by the bank, by the lenders. Then there is location, and that one is not negotiable. You have to choose the right location.
Then there is the sort of property that you end up buying. I’d rather choose the right location and have an apartment than house and land in an area that isn’t going to have the best location. I think location is the big one that you can’t change. The others change with time.
Kevin: That’s wonderful, Michael. Thank you so much for sharing that with us. That’s Michael Yardney’s five-stranded approach. I appreciate your time, Michael. Thank you so much. Michael, of course, from Metropole Property Strategists, and you can always follow Michael on his blog, of course, Property Update.
Michael, thanks for your time.
Michael: My pleasure, Kevin.