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If you haven’t got a story about how your property investment returns were lower than you expected, you probably have a friend or two who do. Understanding the root causes of these less than desirable outcomes will allow you to maximise the likelihood of positive investment decisions in the future.
In this blog I will briefly touch on information & knowledge gathering, and more importantly, deciphering what information is worthwhile paying attention to!
Knowledge gathering is a lengthy and arduous process. The most common cause of lower than expected property investment returns is a lack of knowledge of, and access to, quality information prior to making the investment decision. This may occur due to a lack of effort, time, following poor information, or simply not knowing where to go to access beneficial information. Information is everywhere if you look hard enough, but who and what should you listen to?
Information can be obtained via
• statistics (relevant and misleading), – see example below
• property sales people,
• magazines, newspapers,
• mortgage brokers,
• financial planners,
• buyers advocates,
• lending institutions – see example below
• data reporting tools.
Some questions to pose to information providers are
1. Do they sell property? If they do sell property, very closely scrutinise the information provided or just walk away.
2. Do they analyse property for a living? There are not many people who are great at something when it is not their primary focus in life. Reflect on your own profession, if you were just starting out in your profession and spending limited time undertaking the education required how successful would you be at it? How much time did it take you to become an expert. Some research suggests most people require 10,000 hours to become an expert at any discipline.
3. Are they independent? With so many different sources of property information it can be hard to determine what sources are worth your time listening to. You may undertake significant research and still find it hard to differentiate between what is fact and fiction. This can commonly result in an investor having little understanding of the true risks they are taking when deciding which type of real estate and the specific property to purchase. Remember every single property is unique and therefore will provide a different return on growth and income. It usually pays to receive education and direction from those that are providing independent property information.
Information Example – Lending Institution
One simple example of how you can obtain general information to help you determine risk is discovering which property types banks are more reticent to lend against. Banks have spent more time analysing property risk on the macro level than any other group. This information can help to minimise the risk of making an investment mistake. If a lender has reduced the loan to value of the property ratio (LVR) allowable for a certain type of property or post code, then clearly they have concerns around the likelihood of the property holding its value, let alone appreciating. You can pick up the phone and speak to your mortgage broker or bank loan sales person to get an insight into the types of properties and post codes that the banks are concerned about.
Information Example – Misleading Statistics
One simple example of how information can be misleading is when growth rates quoted in a suburb or town are affected by a new development. This can occur when new properties are sold above what has been the average price for the area, impacting the median and mean sale value for that area. Information via the media, property data or sales people based on the increased average sale price could superficially suggest the particular location has grown in value. This could sway investors to purchase property in the area based on this information. What has actually occurred is not existing properties being sold for more, but newly built properties being sold above the old average value creating a false impression of value growth.
This blog has barely scratched the surface of this topic, suffice to say having a greater awareness of some of the areas outlined will help ensure that you make a more informed property decision and stack the odds in your favour.
Written by David Johnston, founding director of Property Planning Australia (PPA) and co-author of Property For Life – Using Property To Plan Your Financial Future. Property Planning Australia was established in 2004 and is a multi-award winning property, finance and financial planning consultancy that provides its clients with a holistic approach to financial and investment advice.
The PPA team specialise in developing holistic property strategies for first home buyers, investors, upgraders and those transitioning into retirement. To find out how PPA can help you make the right property decision today for your tomorrow, contact us.