Being an active property investor involves making decisions about everything from asset selection and finance, through to tenant types and repair priorities.
Making the right choices is imperative because poor decisions in real estate can be expensive. Perhaps the most crucial conclusions an investor needs to reach revolve around property value and rental assessment. Get these two elements right and you can maximise your results. Muddy these numbers and a very costly result is on the cards.
Of all the inputs you must draw upon when assessing property value and rental return, selecting appropriate, comparable evidence is the most important. However, locating, selecting and analysing your comparables isn’t as easy as it first seems.
Here are my top tips to using sales and rental evidence so you can land on the correct figures for your investments.
Take a step back
There’s no two ways about it – most property people feel emotional attachment to their investments. While feeling ‘warm and fuzzy’ about your bricks and mortar sounds nice, adding emotional premiums is a mistake that’s easy to make.
People become egotistically wrapped up in their property. They need to step back and look with a cool heart and clear head when they start comparing it to the available evidence. When it comes to calculating numbers, having a sterile approach to the property can be challenging, but it’s the only way to truly gauge at what level you should be establishing sale and rental figures. Take the ego and emotion out – you’re not helping yourself by having rose-coloured glasses on.
Buyers are well informed these days too, so they’ll have done their research. Overpricing your property serves no purpose apart from extending the selling or rental period, and burning out the buyer or tenant pool.
Compare like with like
The key to using comparable evidence lies in identifying transactions that relate to properties as similar as possible to yours. Do not use vastly different properties and then attempt to justify and compensate the figure to draw your own conclusions. There’s a huge margin for error in this approach.
A three bedroom is a three bedroom – do not compare it with a five bedroom. River frontage is just that, not eight blocks back and facing the opposite direction – regardless of whether it’s in the same suburb or not.
While you would like to have identical recent evidence, at a minimum you should seek five primary similar features:
- Number of bedrooms
- Number of living areas
- House size
- Land size
- Construction type and age
- Keep it recent and local
When markets are moving, it can be hard to keep up. It’s even more difficult when they’re changing direction. To overcome this, I believe you should try and keep your comparables to those that have transacted within the past three months. This is a tight enough time frame to ensure relevance. In fact, some of the best evidence for sale prices are those contracts that are signed and unconditional, but still awaiting settlement. Rental data must be recent too.
Not only do rental markets move cyclically, rentals also have micro movements within the course of a year. Ask any tenant and they’ll tell you that, during certain months, supply will dry up. In large metropolitan centres, this is often around the start of a year and towards June when transient workers and students are on the move. In regional areas in might follow employment prospects, such as seasonal picking in agricultural regions. Either way, ensure rental comparisons are up to date.
Use reliable data providers
Locating data can seem tricky, but with a little effort it can be unearthed. One approach for determining value is to get three local agents to do market appraisals for you. They’re area experts who have access to great, up-to-date information via either portals or their own recent recorded sales. They’ll happily package and present these details to you.
If you do go solo in your hunt, make sure sales and rental evidence is unearthed from a reliable source. Data providers, such as CoreLogic, record confirmed information and are even the go to choice for property valuers whose professional survival relies on adopting reliable sales and rental evidence. Another source is the major listing portals which also have a ‘sold’ tab on their homepage. These can provide very up-to-date evidence, however if there’s any doubt about the stated sale price, make sure you call the agent to confirm the figure.
With rental comparisons, you can check on the portals again, but the best source will be your rental manager. These professionals have plenty of data among their files and should be able to provide you with reasonable comparisons for determining what to seek on your next lease.
Here’s a tip worth remembering – set a calendar alarm that provides a two-month heads up on your rental property’s lease expiration. This gives time to gather evidence and get your head around your area’s rental market strength.
Avoid bad evidence
When choosing comparables, dig below the numbers and understand the transaction. If you don’t, there’s a risk of relying on bad evidence that’s out-of-line with the market. Bad evidence usually involves an additional element that will see a buyer pay a seemingly higher or lower figure than could be reasonably expected for a property. Some examples of unreliable sales evidence might be transactions that involve a sale between family members or to an adjoining owner.
Also, watch out for sales of properties with redevelopment potential – particularly where a higher-density zoning is involved. Their prices will look skewed, but study the information carefully and you’ll discover why.
Rely on outside eyes and minds
If, after applying all this advice, you still can’t dispassionately and logically use the comparables to assess your value and rental, then there’s an easy solution. Remove yourself from the process and employ an expert who can. Soldiering on will only have you spinning your wheels and wasting your time. Get the job done by someone who can quickly and accurately resolve the figures, because two months’ worth of procrastination might cost you five per cent in returns.
Written By STEVE WATERS