Podcast: The Best Place to Get Data When Considering an Investment Property | Ep. 231

Posted by Ed McKnight on 05/05/20
The Best Place to Get Data When Considering an Investment Property 001
Listen to the Show

Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss a new data source from QV that investors can use when considering investments in different areas.

While the tool can give broad insight into gross yields across multiple suburbs, we do question their usefulness when applied with a broad brush across the whole suburb. Better to use the additional features to dig down into the number of bedrooms and type of property you are considering.

We also mention our upcoming property investment webinar, which is coming up this Tuesday at 7pm, where we will be discussing how to live off your property portfolio.

Transcript

Transcript of the Podcast


Ed McKnight:
Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show, we're going to give you a recap of the key points from a recent webinar I did with the Auckland Property Investors Association.

So Sarina, the general manager from APIA came on and said, Ed, can you come and do a webinar on how to read economic data, and can you help us know, what should we be looking at and what shouldn't we be looking at? And there's a really interesting analysis from qv.co.nz which I just wanted to go through because I think it makes clear some points that we keep reiterating on this show, but I think just need to be sunk in a little bit more when I'm talking to people, which is that we can't just look at gross yields across different suburbs and compare them accurately because it's not comparing apples with apples.

And I just want to give you a quick example of this before we dig into some of the other analysis that we've found. So when I compare all the suburbs in Auckland and look at their gross yields just from this, and by the way, I'll link this up in the show notes. This says that the suburb of Epsom has a 1.8% gross yield. Now, how's that calculated?

That's calculated by taking the median rent from Epsom, which has $620 a week, and then taking the yearly rent, which has 620 multiplied by 52 and dividing that by the average value of a property in Epsom, which is just under $1.8 million. But what I just want you to do when hearing those numbers is think, well a $1.76 million house in this case is somebody really paying $620 a week to live and a $1.76 million house.

The answer is clearly probably not. It's just the fact that there are not that many rentals in Epsom and of the ones that are they're probably not the average house. So, the average rental at Epsom is probably different from the average house in Epsom, we'd expect them to be quite different, you know, Epsom is a very well to do suburb. It's likely got some much bigger stately, really nice homes. Those aren't necessarily going to be rental properties, which might be more flats or apartments or smaller kind of homes, which aren't valued as much.

So when you're reading a report like this and comparing gross yields and thinking, well, where am I going to invest? You've got to dig down even deeper into the data and look, just to make another point, you know when I'm looking at this, if it's $620 median rent to live in a $1.6 million house, you've got to compare that to something like, I'm trying to find a similar suburb like St. John's where the median rent is $610, but the median value of properties is about $1.15 million.

In this case, if this were true, most tenants would pay the extra $10 and live in a property that's worth about $600,000 more. You see, it doesn't make sense, the data is not necessarily accurate in terms of that. The median rental in Epsom actually having 1.8%. Now, what's really good about this little tool, actually, which I really liked, and this was a new tool for me, is that you can actually dig down into the types of property.

So whether it's a flat house or apartment and the number of bedrooms, because this is going to give us a much better comparison about what the data actually shows. And once we do that, and we can scroll back to Epsom and see that it has, I think about a 3.3% gross yield because the median rent on a two bedroom apartment and an Epsom is $600 and the median value of that is about 950,000 which is a lot more what would expect.

So we'd expect that there are more of these smaller apartments, flats, houses, in Epsom, which are rentals as opposed to ones that are owner occupied, which would be tend to be bigger, more valuable, and have a larger number of bedrooms. So the key message is always dig deeper into data in order to be able to make your property investment decisions.

And we were just, a previous episode we did talking about the latest REINZ data, where I think Hawke's Bay had increased in value by 10% so just because you buy a property or owned a property within the Hawkes Bay over the last 12 months doesn't necessarily mean that the price of your property or the value of your property increased by 10% as well. And in fact, it might've been lower than that. It might've been higher than that.

But the trick with property investment or the, not the trick, but the art of it is in being able to select a property that is going to not just get the median growth rate, but go beyond that as well. You know, you can't just buy any property and say, okay, I'm going to get that gross yield of say, 1.8% in Epsom or whatever the growth rate happens to be. We've got to be a bit more strategic. We've got to dig into that data so that we can figure out what is going to be the best property investment decision.

Now, Andrew, when you're looking at all of this, what are you seeing and what do you think people should be taking away from these sorts of analyses and data.

Andrew Nicol: So, I think the key take out Ed is just like you say, dig really deep into the specifics on a property that you're looking at. So when we're looking at properties for investors, obviously what we're doing is assessing all of the factors, be it rent, potential growth, all of those kinds of things, and actually looking at every investment on its own merits.

And so, again, not being tricked by the blanket stat that you're given in a tool like this, and so, you know, also I think a big thing is when you're looking at gross yields, that can be a little bit misleading. You always want to look at what your true cost of holding that asset is or the true income. It's like in business they say that turnover is vanity, profit is sanity.

And so you really got to look at their bottom line contribution or income, and both on income on the asset, but also the growth of the property, not just what the blanket amount is.

Ed McKnight: And look, the other thing I just want to say as well, just you've made me think about something Andrew, which is that there is no blanket basis for selecting rental properties. And what I mean by that is with all the people we've ever talked to about purchasing investments, there is no one model to figure out whether something is a good investment or not.

And that's simply comes down to the fact that there are different strategies. So buy and hold yield or trading of the three main types or strategies to use when investing in property. Within that, you know you'll hear all of these different commentators talk about property and talking up one particular strategy or one way of evaluating a property or one particular metric they look at. But within property investment, we've got to marry lots of different metrics together.

So the ability for capital growth, the yield it gets, the amount of maintenance we'd expect it to have, and that's kind of a proxy for the amount of cash that an investor would need to put into that property unexpectedly. But there's no basis for weighing up all of these different factors. And that actually makes me think about the importance of buying rules so that you are able to make a comparison between properties that you're actually evaluating.

So what I mean by that is it's very hard to weigh up and investment between an apartment and a house because an apartment is going to be high yielding, but low capital growth, the house is going to be generally speaking, higher capital growth, lower yielding. Well, how do you make a comparison between those two? You can't because you comparing different things.

One's based on yield one's based on capital growth, so which are you looking for? You can't make it a very fair comparison. Instead, it's better to look at apartments, comparing them with apartments, especially in the same kind of location versus houses in the same location.

That kind of reminds me of the importance of buying rules, but also because we just wrote a really good article about it as well, which is another reason why it's top of mind as well.

Andrew Nicol: And actually just on that, it's made me think about a client that I was talking to yesterday who I sent three Auckland investments, which as a general rule, I think are excellent investments for my general database. Then we had a conversation afterwards. And what we decided was actually these weren't right for him, and actually we were going to break the rules of what my normal investment criteria would be, or go outside of those for him.

And funnily enough buy something that's going to make more of a loss. Now, the reason for that is because this particular investor has got a very low level of debt on his investments because he's got good income, he's paid down, paid off a number of his investments, and now he's paying a huge amount in tax. And so what he wants is to buy something in a much higher value and much lower end to balance out his portfolio.

So those wouldn't be normal it wouldn't be a normal purchase, the properties that I'm now looking for him, would not be standard and wouldn't suit my regular investor. But because his situation is so specific and, and everyone's is really, you need to make sure that it fits your goals and what you're trying to achieve.

Ed McKnight: Fantastic. And one of the things, the biggest points of confusion I see is when investors, first time investors and existing investors to, you know, go out and they do the right thing. Absolute right thing is you go and educate yourself, but then you try and marry up what everybody is saying, and follow everybody else's buying rules.

So if you follow the buying rules of somebody who only looks at high yielding investments, and then you try and marry that up with somebody who only looks at high capital growth investments, you'll end up not investing at all because you're going and you're trying to find something that's very high yielding, but very, high capital growth at the same time. And in actual fact you won't find any properties that meet that criteria.

So you've got to kind of sit down and figure out your own buying rules and we'll have some more content coming up about this. I've got quite an exciting announcement, which will probably be made in about a week that will probably be be able to help this situation.

But hey, let's wrap it up there, but just before I do, let's read another review out that we've received on iTunes. I quite like this one. It's a five star review and it comes from a Hut Investing Christchurch, I don't have my glasses on so I think that's what it says. Yes, it does. And a five star review and it says best NZ property podcast. I'll take that. And they've said definitely the best podcast available for property investing in New Zealand. Lots of valuable information and tips for anyone wanting to get started or existing property investors well presented and perfect length for daily listing. Keep it up. Smiley face.

Hey, we really do appreciate that review. Not only does it give us the motivation to keep going, it does you know, give us a few things to think about, you know, making sure that we're doing it for 10 minutes and not going over too long. So look, please do rate review and subscribe to the show. And if you do leave a rating on Apple iTunes or the Apple podcast app, we will read it out on the show. We really do appreciate that.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics and insights to help you get the most out of the New Zealand property market.

Until next time.