Margaret Lomas, the author of 20 Must Ask Questions For Every Property Investor, is a financial adviser who has been operating in Australia for quite some time. And in her book, she discusses about a system to determine if a property is suitable to add into your portfolio.
After a rough filter of all regions that you can scan, an investor can apply 20 questions in a specific order to determine if the property is a great one to buy, or quickly eliminate it from the list.
Margaret Lomas believes that capital growth and cashflow can go together, and not mutually exclusive.
Why both capital growth and cashflow can go side by side?
With a good entry price, any property can have positive cashflow. And if you can pick a property before the growth happens, people will be left questioning how you have a great performing property. You do not need to pick the property just before the boom time, rather buying it when it shows all signals of growth, but the market has not moved to reflect the changes.
Since rental income will always be running after capital growth, most people will see the growth first and ignore the rental income when they are out there doing house hunting. But without a good rental income, it can be difficult to hold on to an investment property, especially when you are holding it negatively geared.
People who buy into an area with a steady growth in the past few years, can be left devastated because the growth time is coming to an end. This does NOT apply if the area still shows all growth signals and they are getting stronger. However, most property investors listen to property gurus, or their friends to determine if a particular area is a good place to buy. As a result, their approach is a buy and pray strategy, hoping that the property value will go up and they will enjoy the capital growth one day.
Some preparation before applying 20 questions.
The end goal for us is to choose a property with the best possible chance of growth, while sustain the highest possible cashflow that we can afford.
- Determine the scanning area: first thing to do is to determine the top level area that we want to scan for a property. For me, it will be the whole Australia. For others, it can be just a city region, e.g. Melbourne regions; or a state, e.g. Victoria.
- Workout how much you can afford: obtain a pre-approval from a financial institution. However, keep in mind that if the pre-approval says $500,000; it does not mean the bank will lend you that amount. But it will adjust to your financial situation when you actually apply.
- Scan real estate websites like realestate.com.au or domain.com.au for possible properties that have their indicate price that suits your pre-approval. For example, I want to look for properties with price between $350,000 and $500,000; where the area’s average price is $500,000. Margaret’s argument is that these properties are in the lower end of the area, therefore it is easier to buy and to sell.
- Dismiss properties in areas that have less than 15,000 population: these areas are too small to sustain a good population growth, and most likely they do not have a good infrastructure or diversified industries that can support a good population growth.
- Determine the average yield of investment properties in the remaining areas: we want it to be around 4% to 5%. Anything lower or higher show signs of unsustainability.
What I learned after reading through 20 questions?
They are extremely detailed on what to look for in an area in the first 10 questions, which are only concern about the area’s economy, population growth, external and internal growth drivers. This can eliminate most properties in the above list already.
Then we apply the remaining 10 questions, which focus on the property itself. The good thing is that if we stick to the system, at the end, there may be just 1 or 2 properties left, or we are left with an empty list. This does not mean that the method is invalid, it just means that we need to be more patient and wait for a suitable property to come on market. Or just hire a buyer agent to search for us in those areas we choose.
Overall, this is the most detailed on a system of how to choose a property to invest in that I have ever read. However, property investment is an industry where many fake gurus reside. Whether or not the system is sound, I will need to implement for the upcoming purchase to have a sound proof.
If you want to read the book and discuss ideas, you can obtain a copy here.
By Tuan Nguyen