To achieve positive cashflow and capital growth, property buyers need to invest in regions before they become property hotspots, according to property expert Goose McGrath.
The author and CEO of Dashdot Buyers Agents recently talked to KnowHow founder Bushy Martin on the Get Invested podcast about his ‘Holy Trinity’ principles and the best areas to invest in.
More specifically, Goose and the team at Dashdot aim to help people secure properties which produce net positive cashflow, get strong capital growth and have the ability to be ‘enhanced’ over time – this is the ‘Holy Trinity’ of property.
“The premise is to buy properties which produce more income than they use, make sure they go up in value, and make sure that you’ve got some way to control the outcome,” Goose said.
“So for example if your tenants move out and the vacancy rate goes up, well what could you do to the property? Maybe you could do a cosmetic renovation and make it more appealing to get better tenants. What if you don’t get the growth? Well, maybe you could subdivide it, manufacture the equity etc.
“So it’s this idea of basically creating an ecosystem, it all starts to feed itself as you have the serviceability or the cash flow you’ve got to liquidate the equity, you use that to fund the value adds, the value adds can then help you to fund more purchases or raise your equity or increase your cash flow, and it creates this self-fulfilling cycle.”
Goose went on to explain that in order for these set of principles to work and for you to achieve better growth, you first need to identify where to buy, with new investors particularly needing to find good growth areas.
“The types of properties that are going to make the Holy Trinity criteria are going to be different if you’re just starting out versus if you’re advanced. So if it’s your first property, the value adds you’re going to look for probably shouldn’t be subdivision. The best possible solution you can do is to focus on buying in a really good growth area because you probably don’t need to accelerate your capital,” he said.
“Focus on buying on the market value and focus on making sure you’ve got a high enough yield to cover all of the operating expenses. You’re going for growth, but you’re doing it in a way that the property can wash its own face – it’s affordable growth.”
But how do you find these locations? Goose said investors need to shift their thinking from what’s happening now to what’s next. And so, Goose advised investors to steer away from ‘property hotspots’.
“I’ve got a bit of a contrarian view around what we should be buying. The biggest mistake that I see a lot of people make is they buy in hotspots. You need to buy before it’s a hotspot … so basically if it’s a hotspot now, you’re two years too late – that’s the general premise,” Goose said.
“For example, maybe two weeks ago Newcastle was booming, Sunshine Coast was booming, all these places were booming and everyone’s gone ‘oh my God I need to go and buy there it’s booming! Oh my God they’re going for $100k more than what they’re asking!’ But these are the wrong places to buy. Walk away. And it can be really hard for people because they’re seeing growth, it’s right there, but the thing is you’re chasing losses because that growth is getting priced into the market already.”
Instead, property buyers need to look ahead and find the up and coming areas, better known at the ‘Goldilocks zone’.
“The question is – is it the right location to be investing for the next 10 years? And that’s interesting because you could very easily buy in mining towns and stuff like that and get fast growth. But fast growth isn’t the goal. The way I see it is there’s a period of time, and we call it the ‘Goldilocks zone’, where the market’s not too hot and they’re also not too cold,” he said.
“Now there’s a few interesting things that happen to let you know that you’re in the Goldilocks zone. So for example, sales volumes increase, rents increase first then growth increases, but you’ve got to understand why. Now we want to position ourselves in the Goldilocks zone, which is right before the market starts to take off. What we typically end up doing is we end up buying in the market for about six months and then everybody else rushes in and and that’s our opportunity to get out. And then the market gets pushed up by all of the other buyer activity.
“For example, we were buying in the Perth market up until recently, but by buying in the market when there was less competition, we managed to secure great assets at great prices and some of them have grown by 12% in the last four months. That’s the difference between trying to buy now, where you’re going to be actually paying more than the intrinsic value of the asset and therefore you’re actually waiting for that to make sense. It doesn’t make sense from day one.
“So we [Dashdot] actually have 147 metrics that we look at, from a national to a street level analysis of how do we know if one property is going to grow more than another property or an area is going to grow more than another property area.”
Beyond the obvious financial benefits, Goose said going down this pathway also enables a more pleasant buying and negotiation experience.
“There’s this huge hidden benefit. Of course, you get better properties, more growth because you’re getting there earlier, all of that kind of stuff. But the hidden benefit is you actually get to have a much more enjoyable buying experience. You’re not fighting people. You’re not going into war,” he said.
“I don’t like to be in those environments when it starts to get to a market where we’re involved in multi offices and things like that, that’s actually a sign for us to leave. That’s actually a sign to say ‘ok, everyone else is here, let’s move on now’. If you can get in a little bit before, you’re actually able to have really beautiful conversations with people. And this is how I like to approach negotiation. I think negotiation should be ethical on all fronts.”
But finding the right areas for the future can be risky and requires a great deal of knowledge and research to avoid buying into properties with no potential.
“In terms of how to navigate the current market, I think a lot of people have got to really start to challenge the way they think. Now, there is a big potential risk there though, because when you say that you need to look where it’s not a hotspot, people can go ‘ok cool, so I’ll look for markets that are doing nothing’,” he said.
“It’s very easy for people to go and follow a red herring and just buy in some random town because they’re like ‘well the market’s not booming here, therefore it might be the right time in the cycle’. And so they end up buying the wrong property, the wrong place, wrong time. So you’ve got to make sure you do your research.”
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