When it comes to identifying a suburb with potential, most investors believe they have the willpower to stick with the numbers and avoid emotion.
But in reality, it’s tough. We’re naturally skewed toward the hometown advantage and the comfort of familiarity.
As a result, we have a tendency to inject informational bias into our due diligence. I can give you plenty of instances where a landlord purchased property because their analysis ‘stacked up’, when the fact remains, they relied certain figures solely because it suited their predetermined agenda.
There’s also a tendency to only pay attention to the one or two metrics we’re familiar with rather than capturing wide-ranging measurements that paint an unvarnished picture of potential.
To help expand your palate of analysis, I’m going to revel a set often-ignored statistics ASPIRE Property Advisor Network advisors use in choosing investment locations.
They have little in common with median price movement and shifts in rental yields and everything to do with studying population composition and preferences in order to unearth suburbs with excellent long-term growth potential.
1. Radial population density
When studying any location, our advisors want to seek out suburbs where population density meets minimum criteria within a five-, 10- and 20-kilometre radius.
Why is this important? Because it has a direct effect on both renter and buyer demand.
The basic concept of urban planning tells us populations congregate close to major service and employment hubs. As these centres evolve and grow, facilities and infrastructure are improved to cope with the rising demands of residents.
The flow on is this – all these people need somewhere to live, whether as a renter or owner.
Ensuring your suburb of choice is surrounded by adequate people within defined radiuses means there’ll be adequate demand for your rental property, thus helping reduce vacancies and boost rent return.
And at the other end of your portfolio’s life when it comes time to dispose of your assett and reap the rewards, having a good population density within proximity means there will be plenty of buyers on hand to compete for the purchase.
As a result, transaction numbers are up – improving your portfolio’s liquidity – and prices have more tendency to rise.
2. Owner occupiers to renter ratio
This measure is, for mine, one of the most underutilised in the property investment realm.
ASPIRE advisors intentionally seek suburbs where there is a proportionally higher number of owner occupiers as compared to renters.
Now, there’s no hard-and-fast rule on what an acceptable minimum ratio is, as it depends on entry price, product type and strategy. The closer a suburb is to CBD, the higher the investor/renter rate will be due to the proportionally greater number of townhouses and/or apartments. That said, any suburbs which had more than 50 per cent renters would require much more scrutiny for a house-and-land investment. I’d far prefer a ratio that exceeds two-to-one owners to investors.
So, why is this a key measure?
Well, firstly, having a location which appeals to both investor and owner-occupier buyers mean a larger potential purchaser base when it comes time to sell. Whether the new buyer is looking to move in or seek tenants is of no concern to the vendor but having plenty of people at the auction is.
The second underlying reason for buying in areas with a high homeowner ratio has to do with growth fundamentals.
Owner occupiers are less transient than tenants, so they seek areas where the fundamentals of good buying are strong. Considerations such as ready accesses to services and facilities as well as areas with lifestyle appeal and direct access to employment hubs are magnets to owner-occupiers.
Owner occupiers are a great litmus test of strong appeal for an area.
3. An upwardly mobile demographic
Finally – ASPIRE Property Advisor Network advisors look closely to see if a suburb’s aspirational demographic measures outperform the state’s average.
They want locations where the average income and level of education is higher than the same measures statewide.
ASPIRE is looking for employment breakdowns as part of this as well.
For example, we recently highlighted the great investment potential of Bridgeman Downs in Queensland.
This Brisbane suburb had a number of positive indicators. Among them, was a median weekly household income of $2408 compared to the QLD median of $1402. Bridgeman Downs also has proportionally more residents who’ve completed a university degree as compared to the state’s average, as well as a comparably higher percentage of workers from the medical sector.
Looking for an aspirational populace is a lead indicator of an area on the rise. This group will generally continue to spend more on their housing and will also demand better quality services in their area. As such, you can expect the homes to be maintained to a higher standard. In addition, facilities that are both comprehensive and established are typical in these locations.
The theory says a rising tide floats all boats. When your neighbours are looking to maintain higher quality homes and demand better quality services, it tends to benefit the suburbs property appeal as a whole.
While these measures are not the sole arbiter of a good investment location, they are strong foundations on which base further scrutiny.
The challenge is having the ability to accurately analyse the figures and reveal excellent investment options. That’s where the skills of an experienced and qualified (QPIA ®) advisor come to the fore. Make sure have one on your team in order to lock in a low-risk, high-return suburb option.
Richard Crabb, Aspire Property Advisor Network, 24 July 2020