Researching a suitable location for your next investment can be a daunting process. Many investors don’t know where to start. Here are some points to help you buy well.
Understand supply and demand
Price growth happens when demand exceeds supply. All categories of research fall under one of those two main banners. Supply is easy to gauge, you simply look at what’s currently for sale, what is for rent and what is to be built in the future. You want as little supply as possible.
Demand is a little trickier. There are a number of stats you can look at to get a good gauge. This include:
- Days on market: This is the number of days it will take for a property to sell once it’s advertised for sale. On average, it takes about 90 days to sell a property. In a strong market, where demand outpaces supply, this number will be lower.
- Vendor discounting: In a slow market where demand is low, vendors might struggle to get buyers interested. In this case, they drop their asking price. If the area is in high demand, discounts are virtually non-existent as vendors know they could get the price they want.
- Vacancy rate: The vacancy rate is a measure of how many rental properties in a suburb are untenanted. In a high-demand area, renters will be fighting for any available rental properties, and so this number will be low.
- Auction clearance rate: The auction clearance rate is the number of properties that sell as a percentage of those that go to auction. With more sales, there will be a higher clearance rate. A high clearance rate represents a high demand compared to supply.
Signs that prices may be on the verge of a growth spurt:
- Properties are selling quickly as evidenced by low days on market.
- Increasing number of properties sold off-market.
- Vendors are reluctant to drop their asking price.
- More properties are sold via auction rather than via private treaty.
- Low number of properties available for sale.
- Limited number of properties available for rent.
- Rising rental yield despite growth in value.
- Dramatic rental growth recently.
- There are a large number of people searching for property.
Avoid these newbie mistakes
- Buying in regional areas, chasing higher yields
- Buying cheap simply because it’s cheap
- Buying units that suffer from oversupply problems and have little uniqueness
- Buying new properties that come at a premium
- Misunderstanding what truly drives growth
- Limiting yourself to only local markets
- Not starting by filtering out ordinary markets
- Making decisions based on faith rather than fact
- Failing to objectively consider risk