Land, what to buy or where to buy?

Land.
Do I need land?
How big?
Where?
How much is it worth?

Land is seemingly the most basic thing to think about, after all it’s just dirt; or is it?

Land is one of the most overlooked, underestimated and deceivingly complex subjects for a lot of investors, especially new ones.

The reason behind the statement above is when you buy land, you’re not really just buying the dirt, or the house that sits on the dirt. You’re buying into a market, and markets are as confusing to people, as are women to me.

The first and foremost aspect of land an investor should consider is location. Other factors, including size, are irrelevant if you're buying in a location where there is no, to little demand.

Again, a land’s location really isn’t about the land per se; more about market forces and the demand for that parcel. I’m not saying that the land’s qualities are unimportant, I’m highlighting that demand for the land is initially more important.

Land’s demand is made up of the needs and wants of thousands of people. People that all operate on their own prerogatives and timelines however are all usually influenced by many common factors simultaneously such as interest rates.

To understand the demand for that house you’ve been considering. Build up a detailed understanding of all of the forces that are going to influence that property’s growth.

We are talking about hundreds of thousands of dollars here, so let’s make sure we know where every dollar is going. After all I spend 10 minutes deciding whether or not to spend $0.99 on an iPhone app so what’s 10 minutes spent on digesting this post in comparison?

Bluntly put: Purchasing property without thorough understanding is to investing as is playing darts with a map as a board, whilst blindfolded.

Research, research, research.

That’s what you need to do. Start with the market macro and then work down to the micro.

For those familiar with fundamental stocks it’s a similar line of thinking. Learn to understand a whole industry, where companies fit in that industry, what’s influencing them, how they’re performing and even how management is controlling them. Then buy the best stocks if everything stacks up and they’re aligned with your purchasing strategy.

So, with property, try and understand the market before even trying to pick a specific house. Once you piece all the information together it’ll become apparent where and what you should be buying to achieve the results you need.

Research exercise: Carefully consider each of the topics below:
You don’t have to understand all of the correlations straight away, the more you learn the more the pieces will form a picture, like a puzzle. (Note: If you’re starting a portfolio purchasing in an area you know really well, whit is often a recommended way to get started, skip 1 through 4 below).

1. International

a. Overseas conflict and its effects on energy production/ demand;
b. Refugees and impacts on recipient countries’ economies;
c. International trade agreements (TPP, bilateral);
d. Commodity demand;
e. B.R.I.C.S growth/ resource demand;
f. Impact of all of the above on our National/ State growth;​

The goal with researching international activities is to establish what influences outside of our country play a role with the housing market. For example, conflict in Syria has led to the exodus of more than 700,000 people who have fled to neighbouring European countries. These countries may soon be economically strained/ disrupted trying to support the refugees during this transition which may lead to a lower consumption rate of energy and resources. This in turn may cause the prices of resources to decline further placing more strain on areas in Australia where income is heavily derived from commodity industries. Parts of QLD, NT and primarily WA are likely to be the most effected. This may soften housing price growth in these states.

Furthermore new bilateral trade agreements have been set up due to the ongoing low economic growth; it’s not known yet how that will impact Australian industries however sectors such as VIC’s already contracting manufacturing centre may be hurt if China, a manufacturing powerhouse can be even more competitive than before, reducing the prospect for income increments and thus housing price growth in VIC’s manufacturing areas.


2. National

a. GDP (especially Housing/ Commodities/ Resources/ Mining)
b. Government policies for housing (APRA stance, Neg Gearing, Tax, FHOG, etc)
c. Cash rate (Interest rates)
d. Strength/ Weakness of AUD$ (Exports/ Imports, cost of building materials)
e. Standard of housing affordability (Median Multiple)
f. Median household income (how much can people afford to spend?)
g. Labour Force & Unemployment trends.​

Government policy coupled with the RBA’s Official Cash Rate are the most important factors here. That being said APRA’s new risk loading for the banking sector will come into force in a few months which may reduce the level of investors in the market dramatically. We’re also already seeing changes in mortgage rates and lending approvals due to banks getting ready for the shift, which has slowed down markets such as Sydney’s in recent months.


3. State

a. How has the property market been performing?
b. What part of the cycle is it in?
c. Are there any patterns in the growth?
d. How is the state performing in GSP?
e. What is the future outlook for GSP?
f. What industries are the main contributors to GSP?
g. How will those industries perform into the future?
h. What is the unemployment rate and (more importantly) trend?
i. How much job creation has there been/ will be?
j. How is population growing/ contracting? (Migration?)
k. How many dwelling approvals have been issued?
l. What is the under/ oversupply of housing?
m. What is the affordability situation?​

I’ll post a full write up on Victoria so people can get the idea of what to understand when looking at states. That should help those people on here that ask MEL, SYD, or BRIS and the like.


4. City/ Town (Urban/ Regional)

a. Affordability (Historic maximum commitment level for a household is around ~35% - 40% of after tax household income.)

i. Median household income/ tax rate?
ii. Median House cost?
iii. Median Unit cost?
iv. Assumed deposit required;
v. Assume interest rate;
vi. Rental yield houses?
vii. Rental yield Units?​

b. Volume/ Liquidity

i. No.# sales/annum Houses?
ii. No.# sales/annum Units?
​

c. 12month, 36 month and 10 year average growth?
d. 12month, 36 month and 10 year average yield?
e. Number of suburbs growing/ falling in value? (Where)
f. Price ranges of properties that grew/ fell in value?
g. Growth cycle identification (Where is it? Peak, trough, upswing, or down-turn?);
h. Areas of development/ gentrification/ infrastructure projects;
i. Main industries (Areas they’re in?);
j. Industry growth/ contraction (job creation?)​

Looking at a whole town or city is usually where people start if they prefer to buy something that’s close. It’s important to understand where the city/ town is mainly making money, where there is the most future growth for that money and where the people who are making that money live/ want to live. If you can understand that, you can just follow the money to the relevant suburbs. Money going into areas can create better housing prices.

 

5. Suburb

a. Demographics

i. Dwelling Types (and their percentage of the whole)
ii. Owners vs Renters?
iii. Place of birth?
iv. Gender?
v. Age?
vi. Household Income?
vii. Employment? (main employment industry?)
viii. Mode of transport?
ix. Religion?
x. Education?​

b. Job centres (Where are the main industry’s companies based?)
c. Transport infrastructure (Road, Rail, Tram, Bus, Ferry, etc)
d. Education establishments (Schools, Universities, TAFE)
e. Lifestyle areas (shopping, entertainment, amenities)
f. Proximity to CBD;
g. Proximity to Water/ Beach; Views (on a hill), Natural attractions/ Parks;
h. Crime Rate?
i. Zones (Planning)
j. Power pylons?​

This is where you compare suburbs to one another. Ideally you want to understand the fundamental man made attractions for living, the natural attractions for living, and the potential for people to increase the desirability of that area by putting more money into it.


6. Precinct

a. Reputations of different precincts? (Desirability)
b. House unit prices within precincts?
c. Schooling Zones?
d. Proximity to Telecommunication switches?
e. Proximity to Hospitals, Police, Fire and other services?
f. Shopping/ Lifestyle?
g. Good Streets/ Bad Streets
h. Overland water flow, major storm waterways, flood zones.​

Every suburb (that’s big enough) has smaller areas in it which people will regard in a certain manner. Here you want to understand what that perception is, what makes that perception, is it changing for good/ worse, and will people want to live here more than the other areas in the suburb in 10 years?

Precincts within different suburbs will grow at different rates, it’s all about how much people want to live in those areas more so than other macro factors which we’ve mainly been looking at in the other points.

7. Street

a. Zoning/ Overlays;
b. Type of street?
c. Level of traffic? (Main road/ quiet road);
d. Tree line in street? Established, new, none?
e. Street Character?
f. Street orientation (North – South/ East – West?)
g. Neighbourhood aesthetics?
h. Period of properties?
i. New properties, gentrification?
j. Proximity to precinct/ suburb features
k. House to apartment ratio?
l. Parking availability?​

House prices can differ by astonishing percentages by just crossing a street. There are many fundamentals that make a street good or great, the main ones to consider are above. The old adage of purchasing the worst house in the best street is a good rule to live by. Alternatively try and identify streets that have all the right ingredients but haven’t reached maturity and as such are underrated.

8. Property (Will need a whole thread for this one).

Conclusion
Usually if you do all of the ground work researching what makes an area tick you'll start to see patterns in what types of properties the majority of people in an area will want to buy now and in the future.

Making sure you're buying property in an area where the majority of people are increasing their wages, or are in a growing industry, or alternatively are fighting over a limited type of a certain property stock will help you avoid risk and potentially secure more gains in the future.

Hope that helps with how to understand markets and the land in it. I'll post another thread soon on the nitty gritty with property selection.

TLDR (TOO LONG DIDNT READ): Land is not just land. Land is location. Location is in a market. Market deems growth/ price. Learn to research and understand markets before learning what makes some land better than other land.

 

Totally love this part

But am reading the full one bit by bit. Thank you for the post. Looking forward to Vic post

 

And Lithgow update. (with photos)​

 

Haven't been to Lithgow in over a year, probably due for a revisit soon.

 

Hey Jake,

great post Just wondering when you will follow up with point 8.Property

 

Thanks Luca, Have been writing some other topics that I'll post soon, will get around to Property when I can, it's an extensive topic

 

This is fantastic. Thanks for the post mate

 

Forget about what happened in the past in Melbourne.

The trend is now to head to the West and North...why?

Because housing in these suburbs are about 25-30 klms out...go 25-30 klms out in the Southeast and you are paying over $500k.

I think the North and West are now catching up.....the price of land in new estates certainly reflects this. For example 230k will get you a 400 sqm block in Trugannia (19 klms to the West) the same block in Clyde North (South East) is similar in price but it is 45klms out.

 

Agree, West is catching up quickly. North still has a lot of room and I think undervalued at the moment.

 

Thats right; thr location of yhe land is paramount