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How to smash the market with the 80/20 property principle

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Secret Formula
Smash the Market with the 80/20 Property Principle.

You are about to discover how to easily apply the 80/20 Property Principle to smash the property market in 2017. You will also discover how this clever principle saved me from overlooking an opportunity delivering a potential 30% return. A return created independently of the market.

In fact, this very simple formula will help you pinpoint a small list of suburbs that will deliver 80% of the capital growth in 2017. Capital growth that is both imminent and obtainable with even the smallest budget.

I’ve used exactly the same principle (and BoomScore) to consistently beat the experts since we started recording our results 5 years ago and made this technology available to the public for free. 

So ignore all the annual ‘property hotspot 2017’ lists hitting the shelves. Create your own list of hotspots that matche your budget and goals. You’ll be glad you did.

And equally important, make sure you monitor the suburbs where you own property. The tools we provide are even better at spotting a downward trend long before they make the headlines. You’ve been warned 🙂

Introducing the 80/20 Property Principle.

If you have heard of the Pareto Principle a.k.a the 80/20 Principle, then you know that 80% of all output comes from only 20% of the inputs. What this really means is pretty much ⅘ of our effort is irrelevant. This principle has proven over and over again to hold true for just about anything where there is a relationship between causes and results.

But best of all, in the context of property investment…

80% of capital growth and rental income can be attributed to only 20% of the suburbs in the Australian property market.

This means if we focus our efforts on looking in the top 20% of suburbs in Australia, then we have a very good chance of getting great results i.e. positive cash flow AND market beating capital growth.

Without both, you’re likely to get stuck with one or two properties like the huge majority of investors in Australia.

The 80/20 Property Principle Works.

The good news is the 80/20 principle also applies to property investing.

The pattern underlying the 80/20 principle was discovered in 1897 by italian economist Vilfredo Pareto who noticed that most income and wealth in nineteenth-century England went to a minority of people.

Nothing new here except he also noted that this mathematical relationship was consistent across different time periods and even countries. Today this pattern is commonplace and used widely in business and other areas.

For example,

  • It’s widely believed that 80% of all sales are made by only 20% of the salespeople.
  • 80% of what we achieve in our work comes from 20% of the time we spend.
  • 20% of criminals account for 80% of the value all crime.
  • 20% of products usually account for 80% of the dollar sales value.
  • 20% of your clothes will be worn 80% of the time.

My wife will attest to the last example…

… Now I’m in trouble.

There is not one homogenous property market

It’s widely accepted that not all capital growth is evenly distributed across the many thousands of suburbs in Australia.

There is not one single property market despite the media stating how the “property market has grown by 8%” or the “Sydney market has grown by 10%” for example.

Thankfully, this is where the big opportunity exists for savvy investors.

What if we could pinpoint those 20% of suburbs that produce 80% more capital growth?

Or better still, for a little christmas cheer, why not extend this principle and find those 1% of suburbs that produce 99% more capital growth than the rest. Imagine that?

We found our “80/20” suburbs that averaged 40.97%?

During 2014-2016, the average growth in median values across all 15,000+ suburbs in Australia was 12%.

This number is meaningless to you and I unless we have the magic ability to buy into every property in every suburb to get that 12% AVERAGE return.

With the 80/20 Property Principle, 12% wouldn’t be a great result. After all, it’s an AVERAGE which means some investors did much better (and others much worse).

Over the same period, we picked 50 suburbs based on their DSR BoomScore™.

The DSR BoomScore™ measures a suburbs ratio of demand to supply based on how well each suburb in Australia compares against 8 statistical measures of supply and demand. The average growth in median prices for these suburbs was a staggering 40.97% (houses).

50 suburbs is not 20% or even 1% of all suburbs in Australia but rather 0.3% of all suburbs. But they still averaged 40.97% capital growth which is a staggering return.

(Side note: The BoomScore is generated from our own data sets but we had these results independently audited]

So what does this mean for you?

Property statistical algorithms can be used to rank order suburbs based on their capital growth potential.

With the right technology, investors can easily find 80% of the capital growth by focusing on 20% of the suburbs in the market. The only problem with that is 20% of suburbs means they would have to analyse over 3,000 suburbs (20% of 15,000 suburbs).

Few people have the no-how, technology, time or budget to do this. Except our subscribers of course.

As a general rule, we can use a BoomScore of 30+ as a starting point to narrow our suburb list down considerably. We can then further narrow this list down by our unique budget and other custom filters that match our needs. For example your property portfolio might be heavily weighted towards NSW so you might want to spread the risk to other States. It’s therefore easy to start looking for those ‘20%’ suburbs in QLD for example.

We changed the 80/20 Property Principle to the 99/1 Property Principle.

Using Boomtown, we’re able to further narrow the search down to finding 99% of the capital growth in the top 1% of suburbs as you saw above. One trick is to set the results list to default to a maximum of 30 suburbs by BoomScore.

This is quite simplistic and you should never rely purely on the stats. I only use the BoomScore to generate an initial list for further ‘deep-dive’, on-the-ground research. But I am confident that this list is far superior to any list manufactured for the media without any regard to my personal requirements.

I’ve written about this in other posts, but I could further narrow this list down by adding filters around each of the 8 stats. So for example, I might have 30 suburbs with a very high score but now I want those suburbs with a vacancy rate of 2%+ removed. Maybe I want those suburbs in this new list with discounting  of 5% or more so I can negotiate hard.

My point is….

Don’t miss those hidden opportunities

One of the greatest applications of property data in the context of the 80/20 Property Principle is the ability to quickly highlight potential opportunities amongst a sea of clutter and rubbish.

When I look for investments for my Boomtown subscribers, I know that I need to look at 80 projects to find 20 that meet most of our criteria in terms of location. There it is again!!

Yes, our partners are trained on what we look for at a minimum so this cuts out a lot of the rubbish in the first instance.

But more importantly, the objectivity of the data means I might include an opportunity that would otherwise, on the face of it, have been automatically overlooked.

The Lomax Project is a classic example.

When my developer-partner Charles invited me to consider The Lomax for my subscribers, I initially passed on it.

After all it’s a Unit project in close proximity to the Brisbane CBD. I thought, “Seriously?” I mean we’ve all read the media headlines about oversupply of apartments in most capital city locations.

Fortunately, I quickly did a BoomScore ‘develop-and-sell’ data analysis and discovered there is a very good reason why some very sophisticated investors have already committed over $3m in  this project. And they did so without half the data and research I had at my fingertips to help with my assessment.

The DSR BoomScore™ algorithm is calibrated to pinpoint suburbs with extraordinary capital growth potential based on the ratio of demand to supply calculated using 8 key property statistics. On this basis the suburb was ‘okay’. Better than most inner-ring Brisbane CBD suburbs but not one I would have expected much imminent organic capital growth from.

But what about the suitability of a suburb, and the development site itself,  for the purposes of developing and then selling the finished product?

This is a very different question to “can you show me all suburbs with a high BoomScore™ and therefore imminent capital growth potential?”

Fortunately, I can examine the data behind the BoomScore™ in the context of investing in property development where the aim is to sell the units for a share in the end profits.

Check out The Lomax research to see how I did this

When I look at all the locations in Australia in the context of buying a site to develop-and-sell, this location was easily within the 20% of locations that will produce 80% of the development profits.

This is very difficult to prove and the data on it’s own is never conclusive and there are other risks associated with investing in development. But for the purpose of comparing competing opportunities, this data helps me check the suitability of investing in a development project where my returns are based on the profits rather than buying a property to hold for capital growth for example. It gives me peace of mind that I’m not wasting my family money speculating on the property market. I want more certainty on my returns through smart location selection and manufactured capital growth.

Michael Fuller Hotspotcentral

Michael Fuller is the creator of BoomScore and an expert on selecting property development opportunities for his thousands of users and subscribers. Michael's commentary has featured extensively in the media and his data is relied upon by thousands of investors both professional and DIY.

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