Charting the relationship between prices and rents: Terry Ryder
On Wednesday I spoke at seminars in Sydney where I heard about a property investment strategy that is different in many respects to one I would pursue. But it’s a very good and successful one, nevertheless.
It reinforces a point about which I’m constantly aware: there’s no single strategy for property investment that can be called the right one. The best strategy for buying property and building a portfolio differs from one person to the next.
Here’s what David McMillan of Performance Property Advisory does on behalf of his clients. He and his team identify one market which, above all others, stands out as the one that offers the most value.
They focus exclusively on that market and devote big resources there to learn all they can, establish a network of service providers and be ready to move quickly when the right properties become available.
A core plank of the strategy is to buy in areas likely to show good growth in the first three years. Early growth creates the equity that helps to fund the next purchase and build the portfolio.
“People can’t stump up a deposit of $100,000 or $150,000 every time they want to buy another property,” McMillan says. “So we buy them something for $500,000 that will be worth $650,000 in three years time. They build their portfolio using the equity that has been created.
“Most investors only get as far as one property, because they make mistakes. Those mistakes are leveraged and amplified.”
McMillan and his team has a track record of targeting future growth markets well ahead of the pack. They were buying in prime suburbs of Sydney in 2012, in advance of the three years of strong price growth that followed.
Once the temperature rose as the herd stampeded into Sydney, the PPA team exited. The properties bought for their clients in Sydney have grown 40% to 60% in value.
The next focus was Brisbane, with the emphasis on prime suburbs close to the CBD. They started buying there in mid-2013 and have bought close to 300 properties for clients. They’re now on the way out of Brisbane, as more investors come into that market, making it harder to find good-value investments.
“We buy established property, not new property. New property is the most expensive way to buy real estate and the least effective way to grow a portfolio. We look for scarcity and we look for good quality property in good areas.”
How do they know the right time to focus on a particular market? One of the key research tools is charting the relationship between prices and rents.
When Sydney had gone multiple years without significant price growth, but rents had grown considerably, they knew it was the right time to strike. “We want a location with price stagnation for 5-7 years plus a significant increase in rents,” he said.
An example was the top end suburb of Rose Bay. In 2012, the median price had grown only 15% in the previous eight years. But rents had grown 70%. According to the formula, that meant the suburb and many others like it in Sydney were primed for a growth spurt.
“It was very clear what was going to happen in Sydney,” McMillan says.
McMillan offers three keys to successful investment: buy in markets showing value, buy at or below the median price for the target region, and buy quality.
“We won’t recommend a property to a client that we wouldn’t put in our own portfolio. If you don’t like it and wouldn’t live in yourself, then it’s probably not a good property to invest in.”
TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter.
