The best advice we could ever give any investor is to make sure that you do your homework. In today’s show Josh Masters, from BuySide.com, tells us where we can go wrong when researching a market or a property.
Kevin: The best advice we could ever give any investor is to make sure that you do your homework. But just doing your homework doesn’t necessarily mean to say you’re going to buy the best property. Let’s have a look at where some people go wrong with their researching when they’re looking at either a market or at a property. A man who is experienced with this is Josh Masters from BuySide.com.
He joins us. Good day, Josh. I haven’t spoken to you for a while, but it’s nice to have you back on the show.
Josh: Thanks, Kevin. It’s nice to be here.
Kevin: Now, where in your experience do people go wrong with their researching?
Josh: We really take a top-down approach to research. We start with the area and then look at the property. In terms of looking at the area for research, I find most people really base their findings off opinion rather than facts and figures. They’ll be standing around the barbecue or they’ll talk to a friend and they’ll get their opinion on where they should be investing rather than really looking at the data and the research that comes out.
There are a couple of key indicators that we look at that are quite critical that anybody can find, and most of them are free. But here are some of the probably key ones that I would look at:
- Amount of supply in the area. You can look at infrastructure plans that are coming up. Often the local government websites have those.
- Days on market and vacancy rates. They’re key indicators on what’s happening in the marketplace and how quickly it takes to sell.
- Of course, the king of them all is probably the capital growth rate and the position that that area is in the cycle in terms of that growth cycle.
Kevin: Let’s have a look at couple of those, if you don’t mind. It’s one thing to know that they’re things you could look for, but what is that you’re looking for in those stats? In other words, for instance on days on market, what would you be looking for there? Maybe explain to us what that really means.
Josh: Absolutely. That’s an excellent question. Basically, it really falls down into a risk or reward component. Now, days on market is a risk component. It measures risk. What I mean by that is a lot of my clients put their money into a property market and they don’t want to risk it; they don’t want to lose it because they worked very hard to get it.
Now, if they’re invested in five properties and they get into financial trouble and they need to sell one of those properties off, property is quite an illiquid asset. That means it takes quite a long time to get that money back out of the marketplace. It’s not like a share where you can just sell it today and it’s transacted in a second.
What we want to do by measuring days on market is find how quickly that property would take to sell if they need it to. Now in a lot of the metro areas, you’ll find days on market could be anywhere between 30 and 45 days, which means if you go to auction, it’s selling almost before it gets to auction date, and it could also sell within the first couple of weeks.
Now if you go regional, you might be looking at 120 days plus, which means if you’re in financial trouble and you need to sell one of those little pieces off or those little properties off, it can often take months to really get your money back out of the market, and by then, it could be too late.
Kevin: Yes, you could sell it quicker if you sacrifice the price. But that defeats the purpose of it, doesn’t it?
Josh: Absolutely. Yes, it does.
Kevin: Yes, it does indeed. That’s one of the keys. Some of those other ones you mentioned, as well. I can understand the importance there of days on market. What are some of the other indicators for you, and how do you monitor them?
Josh: Vacancy rates is another one that we look at. That’s often a good indicator of supply in the area. To give you an example, you can go onto SQM’s website and look at this information for free. You can look up a suburb, and you can actually track over time the vacancy rates for that suburb.
Now, if vacancy rates are trending upwards, which means there tends to be more vacancy in that area, that tells me that there’s probably an increasing supply of units or developments coming onto market, the market isn’t absorbing them or demanding them as strongly as it has been in the past, and as a result, you have a lot more vacancy or lack of tenants in the area than you did before.
For us, that is also a risk component. It does indicate the demand in that area. Now, over time that may get absorbed, but I don’t want to buy into an area that’s on the incline for vacancy rates, as an example.
Kevin: That’s a very good explanation there. That website you mentioned, SQM, is SQMResearch.com.au if you want to go and get those stats. That’s Louis Christopher. He’s also a good friend of ours as well, Josh.
Josh: He’s a good man.
Kevin: Yes, he’s a very good man. It’s been great talking to you again. I’d love to have you back on the show again in the next few weeks. Thank you. You’ve been a great help in helping us research the marketplace and the property. Thanks again, Josh.
Josh: My pleasure, Kevin.