Listener questions – Is electing a higher priced A-grade property a formula for disappointment long-term? What do you do with an underperforming asset that promised to do more than it has? (Ep.180)

1. Our first listener question is an intriguing one. Our seasoned investor lifts the lid on some of the aspects of asset selection in relation to pinpointing outperformance capital growth.

He questions whether blue-chip properties actually do outperform, based on the fact that they generally come at a higher price tag than “C grade” alternatives, and he cites some ‘experts’ who have back-tested historical performance and debunked myths like amenities, proximity to the city/beaches driving property growth. Is it true? Or are these ‘back-testing experts’ kidding themselves? And he also probes the trio to share whether they consider data sets in a similar fashion.

2. Blue chip suburbs do in fact outperform over a longer period of time, but it’s all about the time horizon

Cate enthusiastically chimes in to point out that there are more elements to investing than just capital growth.  Cashflow, length of time remaining in the workforce, appetite for maintenance and tricky tenants, and the debt retirement strategy are just a few to name.  Cate sheds light on the three different types of capital growth, including gentrification and explains that long term growth does in fact vary across different areas, and she points out that the blue chip suburbs do in fact outperform over a longer period of time. Circling in on some short range data in selected suburbs over COVID is very different to studying long term capital growth for a given suburb.

3. Money grows where money goes

Dave points out that ‘picking’ a stable suburb that suddenly experiences an explosion of growth can also deliver exciting performance, but he shares his belief in the value of targeting the best quality property early in life, and each time you purchase. The power of compounding capital growth cannot be underestimated by simply putting more money into the market when you purchase than less, all things being equal. This also lends itself to not needing to purchase as many properties over your lifetime which reduces headaches and time investment. His point about a blue chip location attracting higher household income buyers, and hence perennially supporting consistent pressure on property price growth due to strong incomes always driving prices.

4. Show me the money

Pete’s famous ‘five cents worth’ is summed up in four words; “show me the money.” He takes our listeners through the rigour of testing predictions against performance. Retrospective analysis must remain a critical tool in any serious, (and honest) investor’s toolkit.

5. Data is king

Cate explores some of the savvy listener’s precursors for growth and she uncovers some of the metrics that she feels can aid an investor to pick both outperforming and gentrifying locations. Both are quite different and Cate’s word of warning, “If you can see cool cafes, it’s already gentrifying” is a good reminder for our listeners that the data tells you everything.

6. Timing the market versus time IN the market

Pete gives our listeners a hot recommendation… to go back through the PPBP podcast library and have a listen to episode “Timing the market versus time IN the market”, (and we all secretly love Dave’s quick mental mathematical calculation).

7. Should I stay or should I go now?

Our second listener question relates to a disappointing performance on a two bedroom apartment in Melbourne that our listeners purchased some eleven years ago. It’s fair to say that both the growth and the rental returns are underwhelming, and our investor couple are questioning whether to stay the course, or to cut their losses and sell so that they can reinvest their capital.

8. Why have units in Melbourne been so disappointing? And will they spring back?

Melbourne established unit capital growth performance lulled from 2010 onwards, and Dave explains some of the reasons for this disappointing trend. Inverse pressure on supply, combined with a quest for ‘land’ ownership is an interesting trait that has impacted Melbourne (and some other cities), but Cate points out that it’s important to note that apartments have varying degrees of popularity in other cities, (take for example, Sydney where they are quite revered in the quality waterside locations).

9. Target tenants

Cate touches on the importance of understanding a target tenant, and in particular seeking out a property that is more likely to attract a desirable tenant and she also talks about the pain of COVID in the lockdown cities and the impact that the pandemic had on rents.

10. Talk to your planner!

The trio endorse talking to a planner before making a divestment decision, and Cate reminds our listeners that while houses may outperform units, units will almost always exhibit stronger rental returns when considering the two dwelling types in any given suburb.

11. And… the gold nuggets

Dave’s gold nugget relates to our second listener question, and the old chestnut, “should I hold or should I sell?”. He reiterates the importance of questioning “what else could I do with the money?”, and while it’s a huge decision for so many, Dave reminds us that we should be clear once the decision is made, and JUST DO IT.

Cate’s gold nugget circles back to the COVID woes, and the impact of reduced rent and/or rental eviction moratoriums and she recommends that investors refer back to their property manager to get a clear understanding of the current market rental expectation so that they are in sync and commending the correct rental amount.