Episode Details

How do you evaluate the investment potential of a particular property?

Well, that's what I'm going to share with you today as we I share 5 metrics that we use at Metropole when discussing the investment potential of properties that we're considering showing to our clients.

But I'm also going to share 1 metric that you probably think is important, but we think is very misleading.

In assessing a property's investment potential, we have a checklist of more than 100 metrics. I'm only going to share 5 with you today. But they're going to give you a good balance of the science and art of property investing.

If you don't understand what that means, you'll understand a lot better after today's show.

Then, as always, I'm going to share today's mindset message with you.

Here are 5 numbers you can use to assess a property's investment potential and one you shouldn't

When it comes to the numbers (scientific) component, I see many investors get swamped by the seemingly endless numbers that can potentially paralyse them into inaction.

In reality, you don't need to know one million things; you just need to understand a few critical metrics.

While this list is not exhaustive, here are a number of metrics the team at Metropole uses to assess the investment potential of a property.

1. Past sales history

We look at past capital growth to give us an indication of future growth potential.

You probably know that one of the rules in Metropole's Six Stranded Strategic Approach is buying in an area that has a long history of strong capital growth and one that will continue to outperform the averages because of the demographics in the area.

Once we've confirmed the quality of the location, we need to drill deeper into the property itself.

And the best way to gauge its growth potential is to back-track its past performance by getting the history of at least two previous sales (if possible.)

This is where a seasoned buyer's agent with intimate local market knowledge can be worth their weight in gold.

2. Days on market

Days on Market (DOM) is a measure of how long it takes to sell a typical property in a particular suburb, and more important than the actual number is the trend which provides context.

Clearly, when demand is high and there are more buyers than properties available, the days on market will decrease.

On the other hand, when the market is soft because of economic conditions, perhaps, or because of a flood of new properties becoming available, then time on market will increase, which will drive down prices.

This statistic helps investors to identify those locations that are strengthening so they can buy before the masses and therefore make the most of the price uplift as the time on market decreases.

3. Depth of Market

What we're looking for here is an assessment of the supply vs demand balance within a particular market.

This is a measure of how long it would take for the current inventory (number of properties on the market) to be absorbed completely (purchased) based on the current rate of monthly sales, assuming there is no more new inventory being added to the market.

A market is considered to be balanced if it has between 5 to 7 months' worth of inventory (properties for sale.)

If hypothetically all the stock on market (inventory of properties) in less than 5 months that implies there is great market depth – lots of buyers waiting in line, with an inventory turnover of more than 8 months implies an oversupplied market with little depth of buyers.

4. Ratio of owner-occupiers to renters

While many beginning investors have their prospective tenant top of mind, an important strand of Metropole's Six Stranded Strategic Approach is to only buy properties with owner-occupier appeal.