9 ways to outperform slow property markets
What goes up must come down, which seems to be true of our property markets at present.
Now that doesn’t mean that they’ll come down with a bang – but rather a whimper in some locations and just changing down a gear in others.
With the Sydney and Melbourne property markets having experienced significant price growth over the past five years, they have now moved to the next stage of the property cycle where the value of most properties is falling.
But that’s not necessary a bad thing.
Why do I say that?
Well, a rising tide lifts all ships – and one of the worst things that can happen to a beginning investor is to get it right first time – it gives uneducated investors an over-inflated sense of their own ability.
Some will get caught out over the next few years, while those following a sound investment strategy will win the day and will also produce solid results regardless of the state of the market.
In fact, there are multiple property markets around Australia, defined by geographic location, price point and type of property, which are all currently at different stages of the property cycle.
So let’s look at 9 ways you can outperform a slow real estate market.
1. Outperform the averages
Here’s the thing: you are not buying the market, but a particular property in the market.
When I say that I mean that sophisticated investors buy properties that will outperform the averages.
And those types of properties are ones that I call ‘investment grade’.
You know…the ones that offer a level of scarcity, in locations with multiple growth drivers and that will always be in strong demand from owner-occupiers, who drive up prices because they buy emotionally.
2. Don’t try to outsmart the market
Too many novice investors try to outsmart the market by buying in areas they “believe” will perform well at some stage in the future.
That’s because these locations are often the more affordable ones on the outskirts of the city, which they mistakenly think will one day be worth millions.
But they’re wrong.
While all segments of the market tend to do well in an upswing – unless there’s an oversupply – during softer market conditions it is these more affordable areas that are most likely to suffer, especially as interest rates increase.
That’s because these are likely to be first home buyer or blue collar suburbs which are more inters rate sensitive and where wages are going up by less than the CPI, if at all.
3. Inner- and middle-ring wins the race
In my experience, it is the inner- and middle-ring suburbs of our major capital cities that remain resilient in the face of soft market conditions.
That’s because there is always strong demand to live in these areas by people who have the financial means to do so.
As long as they have good jobs, and there’s no sign that our employment sector is wavering, they will desire to upgrade to a more premier or gentrifying suburb that usually have many lifestyle attributes.
And they’re prepared to pay to achieve their property goals.
During the boom times, the ripple effect caused price growth to “ripple” to the outer suburbs.
Now the reverse is happening and with home buyers and investors only choosing quality properties, a “reverse ripple effect” is seeing A grade homes and investment grade properties in our inner and middle ring suburbs holding their own.
4. Free advice isn’t free
Everyone likes free stuff, don’t they?
But free investment advice is normally never free – in fact, it often comes with a hefty learning fee.
In a market upswing, you’ll see many such “advisers” offering insider intel on particular properties.
What they don’t tell you is that they’re usually getting paid a commission to spruik it to you.
When a market is flat, that is the time to get good solid advice from people who have invested successfully in multiple market cycles.
Not someone who happened to make some money during the latest Sydney boom because everyone did, including the investors who didn’t know what they were doing.
5. The horizon matters
I’ve said it before, growth financial independence though property investment takes time – a long time.
In fact, the power of compounding only really starts to show its true colours after about 10 or more years.
That’s why it’s so important to keep a long-term perspective and follow a long term investment strategy that will help you reach your goals.
It’s equally important that you develop the ability to ignore short-term market fluctuations.
Just because a market is experiencing a fallow patch doesn’t mean you should sell up before you “lose it all”.
No – what you should do is ignore it and keep your eyes firmly on the horizon, which evens almost everything out in the end.
6. How do you select an investment grade property?
Over my decades of investing successfully, I’ve developed and fine tuned strategies which ensure that I only buy investment grade properties for myself and we use the same strategies for our clients at Metropole.
These are called my top-down and 6 Stranded Strategic approaches and follows a series of steps that include:
1. Buying at the right stage of the property cycle. I look at the big picture – how the economy is performing and where we are in the property cycle.
2. Then I look for the right state in which to invest – one that will deliver future economic growth which will lead to jobs growth and population growth.
And the I only invest in the capital cities, as that’s where the bulk of economic growth and population growth will occur. I don’t try and fight the big trends.
3. Then within that state, I look for the right suburb – one that has a long history of outperforming the averages. I’ve found some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period. And one that is likely to continue to outperform because of multiple growth drivers. Obviously those are the suburbs I target. In general these are suburbs where the locals have higher disposable incomes, or locations going through gentrification.
4. Once my research shows me the suburb to explore, I then look for the right location within that suburb.
5. Then within that location I look for the right property, using my 6 Stranded Strategic Approach. And finally I look for …
6. The right price. I’m not looking for a “cheap” property (there will always be cheap properties around in secondary locations). I’m looking for the right property at a good price.
To ensure I buy a property that will outperform the market averages I also use a 6 Stranded Strategic Approach, which is a property that:
1. Appeals to owner occupiers. Not that they should plan to sell their property, but because owner occupiers will buy similar properties pushing up local real estate values. This will be particularly important in the future as the percentage of investors in the market is likely to diminish.
2. Below intrinsic value – that’s why I would avoid new and off-the-plan properties which come at a premium price.
3. With a high land to asset ratio – that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
4. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area as mentioned above.
5. With a twist – something unique, or special, different or scarce about the property, and finally;
6. Where you can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
7. Location is non-negotiable
One of the most interesting things about successful property investment is that it doesn’t have to be exciting.
What I mean by that is that there are fundamentals that are tried, true and tested and that you can rely on to deliver capital growth.
One of the most important factors is location because it will have a major influence on your property’s performance.
As up to 80% of your property’s performance will be determined by its location , why would you even try to pick the hotspot the “next” up and coming hot spot, when there are a large number of capital city suburbs that continue to outperform the averages?
So I don’t look for what’s “working now” – I only invest in “what’s always worked.”Investment grade properties in proven locations.
Never compromise on location – it really is as simple as that.
8. Know your finances
Far too many Australians become investors by chance and don’t have the correct ownership or finance structures to underpin their portfolios.
Instead, smart investors begin their investment journey with their eyes open and with a clear financial structure to see them through the ups and downs of market cycles.
One of their most important tools is a financial buffer, perhaps via a line of credit, which can keep their cash flow flowing during any rainy days they may encounter during their journey.
9. Never set and forget
Another bugbear that I have is the term “set and forget”.
Successful property investment is never something that you should just forget about.
In fact, the very best investors regularly review and assess their portfolios annually to evaluate its financial performance.
One question that I regularly suggest you ask yourself is: “If I knew then what I know now, would I have bought that property?”
If the answer is no then it may be time to jettison any under-performing assets so you can buy investment grade ones instead.
There’s no point hanging on to a property that is dragging your financial future down.
The bottom line
By now I hope you’ve realised that successful property investment doesn’t really have much to do with the market at all.
By following a proven strategy that helps you identify investment grade properties in inner- and middle-ring city suburbs you can regularly outperform the averages.
That way you’re not relying on a market upswing to make money because your well-selected properties will be doing that for you – even when the wider market is struggling.
Source: Michael Yardney, March 10 2019