Four steps to suburb research success
There is no silver bullet to finding the perfect suburb, but a little research goes a long way. Regardless of your preference for growth or income assets, use these four steps to take your property analysis to the next level.
1) Quantitative overlays
Affordability
The single-most important overlay is affordability. Ensure that you are able to afford both the upfront and ongoing costs associated with the property as well as any loan used to purchase the investment. Plan for the rainy day that will inevitably happen and have savings available for repairs, maintenance and property vacancy.
Ability to continue to grow your investment portfolio
While you may be able to afford a particular investment, it may prohibit you from buying further investments in the future. Don’t restrict the potential of your portfolio to grow over time by purchasing the wrong investment at the start of your journey. If needed, seek advice.
Current and forecast population growth
Suburbs with a growing population are typically more desirable given this may contribute to an undersupply of property, particularly where the suburb is well-established. Conversely, suburbs with poor population growth indicate a lack of demand for the area and this may impact the achievable long-term financial returns.
It’s imperative to know your numbers before purchasing an investment property. Assessing affordability is critical.
Sustained historic capital growth
Areas that have experienced long-term positive capital growth often have favourable characteristics and strong demand for housing. There will be a reason for the capital growth and by analysing metrics (such as population growth) or availability of services you will quickly identify why that market has performed strongly. Once the cause(s) of the growth has been identified, consider if this growth-driver is likely to continue or if other suburbs are better-placed for outperformance.
Review lower-cost surrounding suburbs and identify if those same growth-drivers are present, accelerated growth may be captured here as a surrounding suburb plays catch-up.
Low vacancy rates
Suburbs with low current and historical vacancy rates indicate strength of demand for rental properties. It’s more difficult for tenants to move from property to property in a tight market and it will be easier to find a tenant should one choose to move on.
Zoning
Depending on your strategy, finding a suburb with the right zoning may be a critical component of your selection process. For example, the ability to add a building or granny flat may be essential for investors targeting additional income. Ensure that any development you want to implement is possible in the suburb you select.
2) Qualitative overlays
Socioeconomic demographics
Socioeconomic demographics support suburb quality and the potential for that suburb to outperform. Strong socioeconomic demographics may support future capital growth, strong income returns or both.
Overlay your socioeconomic research with affordability at this stage of the process. Ensure that you can comfortably afford a property that the typical tenant in the area will find attractive.
And remember, just because a particular suburb attracts certain tenants, does not mean that you are comfortable renting a property to that demographic. Don’t lose sleep over your investment, being comfortable with your tenants is vital.
Property market cycle
The property market moves from times of growth to times of stagnation or decline. There are observable headwinds to overcome in all markets. Beware the transfer of poor-performing assets in rising markets, it’s a perfect time for an investor to make something from a dour investment experience. Declining markets, particularly close to the bottom, may provide an opportunity as scared or debt-burdened investors look to escape the market, selling quality assets at a low price (see how to avoid mortgage stress here). Regardless of the timing, it’s critical to analyse the investment fundamentals.
Also remember that the property market cycle doesn’t move at the same time across the country. While fantastic investment opportunities may exist in one location, it may be necessary to avoid other locations due to property market cycle headwinds.
Oversupply
While common in poor property markets, oversupply may occur (or be anticipated) in any market cycle. During poor markets, less buyers are typically present than sellers. This negatively impacts the price of property in the area.
However, oversupply may be anticipated where significant property development is occurring, such as where units replace houses or land releases are occurring. Prices typically increase where demand outweighs supply. Price growth can be inhibited as additional properties, as a result of development, come to market.
Natural disaster
Considering the risk of natural disaster is important. Some locations have significant insurance premiums and others may be entirely uninsurable. Investigate the cost of insurance in prospective suburbs to adequately assess potential net cash flow and financial returns.
Also ensure that the area you research has sufficient available property with features that address the natural disaster concern, such as houses being built to a specific code. Do thorough research, for example, flooding may be common in some areas but many councils provide comprehensive flood mapping to help residents and investors make informed decisions.
Diversification
Diversifying your holdings across multiple high-quality assets has clear benefits. Spreading your assets across multiple suburbs, cities and states can smooth the risk of investing in a single market that performs poorly. It can also reduce the cost of state taxes (like land tax). However, it’s important to not diversify into poorer suburbs, just for the sake of diversification. Have clear portfolio and asset targets.
Diversification offers lessons to property investors, with tangible benefits offered to those that spread their portfolio across high-quality suburbs in multiple cities and states.
3) Data anomalies
Higher-cost development
While current data for a suburb may be exceptional, the same suburb may not have performed as strongly in the longer term. For example, some regional areas experienced close to 0% vacancy rate during the Covid-19 pandemic. You must identify the drivers for the data anomaly and determine if it is likely to be sustainable. Investing in an area with poor long-term fundamentals should be avoided.
4) Review and comparison
Review your research
Upon completion of your research and compilation of your data, you will need to consider if the suburb is investment grade and suitable for your needs. Compare the data to your investment philosophy.
After completing your research, you’ll have a better understanding as to the quality of a suburb. Don’t stop there though, continue to review other suburbs.
Don’t be disheartened if a suburb or property is cast aside because it doesn’t meet your criteria. This is far from a failure – it shows that your investment philosophy is working. It also places you in a far better position than the average property investor.
Comparing suburb and property research is easy with a product that populates all your data in a concise manner, such as our Investor Forecasts calculators.
Compare to other suburbs
The comparison process is easy. Simply compile, analyse and compare all researched data. Remove suburbs with poorer metrics until you are left with two or three suburbs. Having multiple high-quality potential suburbs is beneficial given a particular suburb may not have the right property to meet your investment needs.
Find the right investment property
About the author: Brenton has more than ten years experience in the financial planning industry. His specific qualifications include financial planning, margin lending, SMSF (self managed super funds) and direct shares. He is also an experienced investor.
Last reviewed: 5 July 2022
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