When considering where to invest and which property to buy, it is important to do your research. But, with so much data available, it can be hard to know which numbers you should be focusing on. In addition to being confusing, this makes it easy to succumb to the dreaded analysis paralysis.
To help you avoid this, we want to share the numbers we believe matter most when picking an investment property. As part of this, we will also outline the trends you should be looking for when reviewing this data.
Please note: In putting this list together, we have taken a broad view of the property data that is usually available. When planning your own investments, there are a few numbers – like your budget and expected returns – that will be more important. The data points listed here are just those we believe give you the best indication of investment potential.
#1: Sales history
When choosing where to invest, you want to find an area that is achieving consistent capital growth. And the best way to check this is to look at the median price trend over the last 10+ years. If the average annual growth rate is positive – and preferably 6% or more – the area could have good investment potential.
It is also worth looking at the past sales data for each property you are considering. In this, you ideally want to see an annual growth rate that is at least equal to the area’s average. In calculating this, you will need to take into account the impact of any significant capital improvements (extensions, renovations, etc.).
#2: Rental price history
Sustained growth in rent prices is also a good indication of an area with strong investment potential. To check this, look at the median rent price and how it has trended over the last 10+ years. If it has consistently increased, this suggests healthy ongoing demand for rentals, which is a positive sign for investors.
We believe this is a more reliable measure than the median rental yield, which compares rent prices with sale prices. And taking a longer-term view of this data helps account for any seasonal or cyclical peaks and troughs. That said, past performance is not necessarily an indicator of future performance, so this should be balanced against forward-looking data points.
#3: Average wages
Generally speaking, there is a strong correlation between an area’s average household income and its median property price. This is because, the more residents earn, the more they are able to spend on a new home. As such, looking at average wage trends can help you identify areas that could soon experience significant growth.
When doing this, you ideally want to see that an area’s wages growth rate is outperforming the state average. This indicates that the local population is becoming wealthier and is usually a sign of gentrification or rejuvenation. This often leads to additional investment in local infrastructure and amenities, which improves liveability and, ultimately, drives future capital growth.
#4: Renter population
Conventional investing wisdom suggests that the higher the percentage of owner-occupied properties, the more stable the local property market. This is because owner-occupiers tend to buy with their hearts (which often means overpaying) and hold their properties for longer. This helps drive capital growth and, given the reduced competition for tenants, can help boost rent prices.
While there are differing views on the ideal ratio, most property experts say a renter population of 25% – 30% is best. At this rate, the sales market should be stable enough to deliver reasonable capital growth. There should also be an established demand for rentals, but a reasonably limited supply of rental properties.
#5: Market depth
Supply and demand are fundamental forces within the market and have a major impact on property values and capital growth. This measure looks at the balance of these two forces and provides an indication of the strength of the market. It does this by calculating how long it would take to sell all the current listings, at the current sales rate.
If it would take 5 – 7 months to sell all the available properties, a market is considered balanced. If this period is shorter, a market is considered hot; if it is longer, the market is slow. As this measure can change significantly over time, it is best to take a longer-term view and look for trends.
Want to discuss this further?
The exact data points you should be looking at will really depend on your investment strategy and goals. For help identifying the right numbers for you, give Search Party a call or book your free investor consultation session.