How should I do my due diligence for an investment property?
1 – Supply and demand – Supply and demand are crucial indicators to consider when researching different investment areas. You should source suburbs where demand exceeds supply. ABS can give you a list of suburbs and how many new homes are approved for building. You don’t want to investigate further when the numbers are too high. RPdata will show you a list of properties for sale or sold in a specific suburb and the classification of house, apartment and property configuration, which will give you a good indication of the sale volume in the suburbs and what asset class is dominant. With this elementary research, you can observe the trends in an area.
- How do I generally know when there is strong demand in a market?
- Low DOM: (Days on Market) If properties are on the market for a shorter amount of time compared to other markets, this may indicate that properties are selling quickly and that there is strong demand in the suburb.
- Little change in asking price: If sellers don’t need to reduce their asking price to lock in a sale, this may suggest that buyers compete against one another and are willing to pay a higher price.
- Properties are selling: If most properties that go to auction sell, this suggests a positive buyer sentiment in the area. Also, if properties are advertised with “open inspection” times rather than private appointments, this means a high number of interested buyers.
- Limited available property: This suggests buyers snapping properties quickly, and demand exceeds supply.
2 – Economic factors
- Interest rates (the cost of borrowing)
- Economic growth (changes in demand) – RPdata
- Confidence/expectations. Update, Property value, real estate, domain, chatting with agents and physical inspections.
- Availability of finance from banks. Years ago, it was also easy to borrow and base on equity. (no income and high-risk profile but a million dollars in equity) Today income is the source and your risk profile.
- Developments, upgrades, and renewals of areas
- Others (depreciation, wage costs, inflation, employment, government policy)
3 – Average property prices and capital growth – it’s essential to understand the properties price in an area and the capital growth trend. It will allow you to pay a bit more and gain nicely. Or realise what a bargain is. In general, it can help you compare whether the price you are paying or being offered is reasonable. It would be best if you drilled down in RPdata and real estate.
4 – Market cycle – usually, we refer to the property clock, in which 8-12 Oclock is the hot period, and 2-6 o’clock is the cold stage. We all know when it is an exciting market that all want to get in and buy and a downturn when everyone is afraid, sitting on the fence and waiting, and prices are generally reducing. The hot market is usually for the sellers, and the cold is for the buyers; however, both markets have opportunities, but it is good to understand when the market cycle is and to get clear with the property risk and return. Generally speaking, you should consider the market cycle of the suburb you’re looking at for short-term gain. Ideally, you would buy in the early stages of an upturn. Important to understand that there is a cycle to every suburb, and usually the Global Cycle, led by marketing companies and the media.
5 – Demographic – it is essential to look at this point. You can check all Databases, e.g. Corelogic and ABS, and it will allow you to understand the trend. For example, young families are keen to live in the area because of the excellent school catchment, convenient facilities, and entertainment.
6 – Disposable income – in general, factors such as employment growth, average property prices, and disposable income can help you to analyse future trends. Areas with high employment growth and high disposable incomes mean people can spend more money on where they live and have more confidence to do so.
7 – Market data – not to ignore
- Demand to supply ratio (DSR)
- Days on market (DOM)
- Vacancy rate
- Rental yield
- Auction clearance rates
- Investors vs owner occupiers ratio
How do I generally know when there is strong demand in a market?
- Low DOM: (Days on Market) If properties are on the market for a shorter amount of time compared to other markets, this may indicate that properties are selling quickly and that there is strong demand in the suburb.
- Little change in asking price: If sellers don’t need to reduce their asking price to lock in a sale, this may suggest that buyers compete against one another and are willing to pay a higher price.
- Properties are selling: If most properties that go to auction sell, this suggests a positive buyer sentiment in the area. Also, if properties are advertised with “open inspection” times rather than private appointments, this means a high number of interested buyers.
- Limited available property: This suggests buyers snapping properties quickly, and demand exceeds supply.
