Do you know which property investors make money in any market condition?
And in this post, you’ll discover the three key ingredients to be a property developer and take your wealth creation to a whole new level regardless of the overall market conditions.
Less sophisticated property investors believe that ‘timing the market’ is the essence of wealth creation.
In fact, there will be many Sydney and Melbourne investors feeling pretty good now, thinking they timed the market perfectly given their huge gains in recent years.
But those investors that get their timing right will admit their success is usually more to do with luck than science. Those that get it wrong fade into the background and sadly don’t make the inspiring stories that sell property investment magazines.
Over the years, I’ve repeatedly stated (and retrospectively been proven right) that you can use clever algorithms (computer problem-solving equations) to accurately pick suburbs that stack up better than 99% of all the others … based purely on huge amounts of property data from multiple sources, that no mere mortal could manually analyse.
It’s about using scientific facts to find the best locations rather than relying on subjective hype and sometimes biased opinion.
Computer algorithms not only examine huge amounts of complex data in seconds but they also house the brains trust of those that intuitively know what effects property prices.
For example, our DSR BoomScore™ algorithm, which powers our free property research app Boomtown (boomapp.com.au), has essentially ‘learned’ what determines a high performing suburb; one that has performed relatively better than everywhere else, and can make science-based ‘judgments’ on what suburbs are likely to be the imminent top performers.
In fact, over the years, our property research tool has pinpointed the top 33% of property hotspots with 96% accuracy.
You and I just cannot do that sitting on the internet with an excel spreadsheet … and especially not to analyse and rank more than 15,000 Australian suburbs!
But what do the majority of us who are not maths nerds do to create property profits, independently of the property cycle, to succeed in this changing market?
Of my 15,000 or so Boomtown users, I would say it is the small residential developers that profit regardless of what the overall property market is doing.
When the property market is stable - which it is becoming now - developers thrive. Why? They have the now-how, contacts and opportunities to build property 15-25% cheaper than market values and so make their own capital growth upfront, so not having to rely as much on market forces.
Imagine if you could buy a brand new apartment (gasp) in a central Brisbane location (double gasp) with near certain 23% capital growth … realized in just 10 months ... and with a 2% boost in rental yield compared to everyone else ... using property development techniques for the non-developer?
Would you be worried about limited short term capital growth and small declines in rent while the supply and demand rebalances?
Small residential development is one of the sure-fire ways to build a solid property portfolio regardless of how the overall property market is performing.
In fact, I think it is actually even easier to invest well when the market is not too hot (like it has been lately). I’ll explain how to find the hotspots in a flat or declining market …
You see, there are many areas within a national, state or regional market that will outperform the market average for capital growth whether that average is a good 8%, like recently, a low 2% or even the disastrous -1.18% of 2010.
So it is foolhardy and simplistic to listen to ‘expert’ opinions on the state of the entire market, when there are always those suburb hotspots that will perform well even when it all seems like doom and gloom.
Essentially, we have 30,000 markets to choose from – the ‘Units’ and ‘Houses’ markets - in 15,000 Australian suburbs. Sweeping statements about State markets just don’t apply to every suburb or even every street.
While it is proven we can use science to find hotspots - locations that promise to ‘buck the trend’ - my only caution is that we can’t be sure how long it will take for the market to pick up, so buy-and-hold property investment strategies can tie up equity for some time.
But the good news is property development, unlike basic buy-and-hold property investment, is not beholden to the general state of the property market.
A slowing down of the property market is often a good thing. Yes I said it. A good thing.
When the overall property market seems to be flattening out or trending downwards, this opens up opportunities in once-neglected micro-markets, where demand is starting to exceed supply and capital growth is imminent despite what is happening State or Nation-wide. You just need to know how to find these investment hotspots.
There may also be other factors that determine a hot suburb in a down turning market … crucial supply and demand factors …
… a change of demographics in an area – say an increase of median incomes relative to prices, leading to better affordability compared to neighbouring areas (the ‘ripple effect’) that then pushes prices up.
… Likewise, population growth fluctuates but is still trending upwards. This is a prosperous western world constant. The question is where is population growth happening NOW and why? This is very hard to measure, even for our time-rich data junkies and the data is usually based on old census figures anyway.
When it comes to property development, the upsides even during any market cycle is obvious:
… The good news for developer-investors is input costs, like the cost of development sites and building costs, generally move in line with the market. So if land prices are going down, they pay less. If construction cools, they pay less to build. Yes, the end prices might also be lower, but their profit margin or discount to market value is usually around 15-25% below what 99% of all ‘mum-and-dad’ investors pay for exactly the same property in the same location.
… The development outcome can also be strengthened further in ‘bad times' by better contract terms across consultants and indeed the owner of the site … and more sites can be purchased with a development approval already in place.
… When the market is hot, owners of development sites without a Development Approval (DA) are conditioned by agents to ask for prices closer to those of sites with a DA and even a Building Approval already in place. Unfortunately, the less experienced developer is fooled into buying these expensive sites thinking they can make them work.
My experienced development partners have noticed more sites for sale with a DA from vendors who intended to develop but, now finding themselves cash-strapped, subsequently realised they would only be digging themselves deeper into a hole by continuing with their unfeasible project.
… No DA? No problem. Local authorities are less overworked in cooler markets and are therefore far more responsive.
… New stock coming to market also declines in a tough market, meaning fewer properties are available for rent. So rental yields begin to climb as rents grow relative to property prices. And this is good news for the investor seeking yields.
Furthermore, the property developer who retains their own stock to meet this market has a huge advantage over the typical buy-and-hold investor because they will have paid around 20% less for their property upfront. This saving on market prices further enhances their rental yield by as much as 2-3%.
… Best of all. There is the ‘sleep better factor’. A 15-25% buffer from the outset means the inevitable interest rate hikes will have a lesser impact compared to everyone else.
So, how do you know property development is for you?
Property developers require all of the following:
… And most importantly: Problem-solving skills.
Obviously, if you don’t have the know-how, then the banks won’t lend you the money. And if they do lend you the money, they will want to see around 30% equity or cash from the Developer to limit their exposure. Let’s be clear … banks will only look after their position.
And despite what some of the property development educators tell you, it does take a huge amount of time coordinating all the human resources that make a development work. It’s not a case of you look on while they do all the work. My development partners reading this will be nodding furiously in agreement.
Oh - and you need to know the right people. Not all builders, architects, project managers, funders, town-planners, etc. are the same. The success or failure is directly tied to these people.
And when things go wrong. And they always do. The traits a developer needs include huge problem-solving skills, a great deal of tenacity and the ability to work under enormous pressure, not mention handling the constant bill payment demands from everyone. And when you haven't been paid for a year these demands can get scary.
So what does the smart money do?
They never pay full price for property. They co-develop which means outsourcing the lot becoming what we call ‘Armchair Developers’. They team up with like-minded investors, provide the development seed funding and then let their development partners do the rest.
… and with returns of 50%+ on cash invested and the possibility of immediate capital growth or upfront equity gains of 15-25%, and the best possible rental yields, it is a shrewd way to invest in any property market cycle...particularly NOW!