Property Investment Factors and Variables

Being a real estate specialist I am always being asked, so where should we invest and what type of investment to you recommend and where?

First of all, I don't hold a crystal ball. Picking a hot property is almost like picking hot stocks in the stock market. Some would argue even harder than picking stocks, because with a stock, you go by previous earnings to forecast future earnings. In real estate, there is not always that historic data to fall back on, though there are some trends and other indicators that I will point out in this document.

Below, we will try to sketch a briefing as to what to look for when choosing an investment property and what variables to use. Taking a strategic approach to investing in property means you need be clear on your goals and the returns you are seeking.

Are you looking for high capital growth or is positive cash flow your main priority? Perhaps you want both? When it comes to property investments there is no one linear way. Your financial position, your risk profile, income and equity will all have a part to play in determining what type of property will suit your chosen strategy.

Your property investment strategy will therefore determine what factors will apply when selecting an investment property. Choosing the right strategy and criteria is so critical to your investment success. No one wants to pick a property that will perform poorly. So here are some very important aspects that you need to vigilantly consider when weighing up different property options.

Look at the fundamental drivers of supply and demand. Examine the data and crunch the numbers. What you do today will help determine your payout in some years from now.

So how do you find a property that ticks all this criteria? Should you weight each criteria the same way? Property investing is both an art and science – the art is in researching, analyzing and negotiating while the science is understanding and interpreting the market data to pinpoint the right suburbs. Researching is a time consuming business. To be successful you need to be serious and commit considerable time to the task. It’s also easy to make a mistake and miss something important along the way. Buying a property is usually the most expensive purchase you are ever going to make in your lifetime. Getting expert help makes a lot of sense.

Buying your next home is both exciting and daunting. Lots of questions may be running through your mind as you start the search….will I find my “ideal home”, how many weekends will I have to look, what is the property market doing, how much should I pay, what if I have to go to auction and...can I trust what the agent is telling me?

While there are several shortcuts, searching for the “right” property does take considerable time. This guide will give you excellent tips to ensure you are well on your way to becoming a happy home owner! Searching for the ideal home may seem like hard work, but taking a few moments to consider your plan of attack will make the whole process a lot easier.

The criteria is built around assessing a combination of these factors.

Location

Location, is very similar to position. We've all heard this before, and so yes, it is true and reasonable to consider. Real estate is all about buying the most well positioned property that will deliver the best capital growth and yield, or return on investment (ROI). What are the prospects for growth in the selected area? Does it have the right demographics and physical appeal to create high demand from both owner occupiers and tenants?

We like to find areas that have a consistent history of capital growth or areas that are being bettered. Look for the surrounding areas that are cheaper or undervalued relative to a major suburb. Aim to pick suburbs that will deliver a growth rate of over 7%. Combine this with a 5% rental yield and you should earn a total return on the property asset of at least 12% per year.

Population Growth & Demographics

The demand for housing rises as population increases. However, property prices do not rise automatically in response to population increases in a suburb/ area. You need to take into account the stock of existing housing and see how much absorption will take place. Critical shortages of accommodation in some regional areas and towns due to large infrastructures or construction projects has often seen property prices skyrocket for a period of time. A large influx of workers creates heated demand for rentals and owner occupied homes. Right now Portugal is having a very high inflow of tourists which means people are turning homes into rentals for tourists, via AirBnb. All this activity is having a positive effect on housing market and prices. Prices will basically tend to rise, until reaching its plateau.

The demographic you want to target include professionals, DINKS (double income no kids) and families with high disposable incomes. The main demographic to avoid is areas with higher proportion of retirees as their incomes are very limited.

Days on the Market

Each property listed for sale will have its own unique features and flaws and the buyers will determine the market price. The number of days a property has been listed for sale is a good indicator of demand. The lower the number, the more quickly the property is snapped up by buyers’ which means the location is in high demand. For example, it takes 43 days on average to sell a house in Porto as compared to approx. 90 days in Braga.

Rental Yield – the Cash Flow

The yield you obtain from a property is a key indicator of the gross rental return (cash flow) you can expect from a property investment.

Yield is calculated as: Rent per month x 12 months / purchase price.

Example: if a property is rented at €1,000 and purchase price is €120,000, then yield is calculated as: (€1,000 x 12)/ €120,000 = 10%.

A yield that is 2% to 3% higher than the variable loan rate should result in a property that is cash flow positive, depending on your borrowing position.

If yields are falling in a suburb, it can be an indicator that there is a possible oversupply of rental accommodation or that property prices are rising (or both). And conversely, rising yields can be an indicator of a shortage of rental stock or that prices are falling.

Choose properties that have high rental appeal, that are well located to shops, schools and transport and have the right features that tenants love….such as security car space or garage, secure entry, storage space and open plan living areas.

You could also consider increasing the rent by adding a furniture or gardening package if it’s located in a tight rental market.

Supply in the Market

The stock on market is a key indicator of housing supply. It is measured by the number of properties for sale expressed as a percentage of properties in an area. The lower the stock on market, the lower the supply of property, or the more demand for it (or both).

Suburbs with a high percentage of the stock on market, is not a well balanced situation. It gives buyers ample opportunity to negotiate and be selective about what to purchase. A high figure for stock on market would typically result in a “buyer’s market” which is not a good situation for long term growth.

Ratio of Renters to Owners-Occupiers

There are two reasons to pick suburbs that have a higher proportion of owner-occupied homes. Firstly, more owners can mean there is a lower supply of rental accommodation in the suburb – you’ll have less competition from other landlords competing for tenants and compressing yields.

Secondly, owner-occupiers tend to take better care of their property than tenants and improve the street appeal of the surrounding area.

Uniqueness

How unique is the property you have shortlisted? Is it a mass-produced apartment with little differentiation to nearby properties in a residential block? If you are looking at a house, what percentage of the price is made up by land value? Aim to select apartments and houses that have some uniqueness value. Check with the local council to see if there are any other large scale developments or land releases about to be approved which could potentially increase housing supply and adversely affect property values in the area. Be careful about buying properties that are too “unique” or niche market. Make sure there is a resale market for the type of property you want to invest in.

Online Search Interest

The internet has revolutionized the way that buyers can search for property and provides excellent insights into what people are searching for. “Online search interest” shows the ratio of people searching for property online compared to the number of properties for sale. It is another measure of demand. The higher this figure, the more demand for property compared to supply for would-be buyers searching online.

Age & Condition of Property

Older properties will typically require more maintenance and have lower depreciation allowances than brand new properties. However, brand new properties also come at a much higher price tag. You will have to complete extensive research to identify if you are better off buying old or new.

Engage a building or pest inspector to provide an expert report on the condition of the property. The building report will identify if there are any major issues with the property – but take this report in the right context – don’t confuse structural issues with cosmetic issues that can be easily fixed. Many older properties provide excellent scope for renovation and value adding.

Price/Affordability

Picking an area purely based on its price point is like picking a restaurant where you base the quality on its' prices. The relative affordability of a town will become one of the major factors in determining price growth in the future. A suburb is considered affordable relative to the average incomes for those living in that suburb. A classic measure of affordability is the price to income ratio. If we say that Lisbon's median home price is €250,000 and median income is approximately €50,000p.a. so the ratio is 5.0 times. Maybe Porto is €200,000 medium home price and the income is the same at €50,000, giving a 4.0 ratio, meaning Porto is cheaper, maybe more bargains to be found.

So picking a winner suburb doesn’t always mean choosing cheap suburbs – it means looking at the incomes and demographics.

Suburbs coming off a low price point and positioned next to major amenities, lifestyle features and with rising incomes is likely to perform better in the long run. It’s generally easier to sell a property in an affordable suburb than an expensive one. The number of days it takes to sell a €1m property is typically a lot more than a €300k property. The affordable end of the market is less subject to wild market fluctuations as common in the prestige market.

Rental Vacancy

Select areas that have a low rental vacancy figure. The “vacancy rate” refers to the percentage of rental properties in a suburb that are currently vacant. A low figure is a positive indicator that there is a high demand for rental accommodation and tenants are fighting over the low number of possible properties to rent. Low vacancy rates area often a pre-cursor to rents starting to rise.

Days on the Market

Each property listed for sale will have its own unique features and flaws and the buyers will determine the market price. The number of days a property has been listed for sale is a good indicator of demand. The lower the number, the more quickly the property is snapped up by buyers’ which means the location is in high demand. For example, it takes 43 days on average to sell a house in Porto as compared to approx. 90 days in Braga.

Discounting

Vendor discounting is the percentage difference between the original asking price requested by the seller and the eventual sale price agreed by the buyer. It can be difficult to measure in suburbs where there are lots of auctions or private treaty sales where the price is listed as “offers over.”

A high demand suburb will have a low vendor discount figure as sellers don’t need to negotiate as much in order to get their property sold.

Value Adding Potential

Another great way to increase your equity is to identify a property that has value adding potential. Examine the property in detail to see if it has the potential to be renovated, subdivided, extended or redeveloped. Look at the block size, internal and external features and assess what could be done profitably. A common mistake by novice investors is to find a “renovators dream” only to over-capitalize and spend far too much on a renovation. Discover what fully renovated homes or apartments are trading for, before committing to a costly (and time consuming renovation). Lots of simple things can be done to increase a property’s value including repainting, carpet, polishing floorboards, and adding new kitchens and bathrooms.

Employment Opportunities in area

Selecting a suburb or region with a diverse range of economic drivers is wise. Rental demand is driven by workers seeking and maintaining employment. An area with solid employment opportunities from a diverse range of industries will lower your vacancy risk. Strong economic vibrancy is a key factor to look for particularly in regional and rural areas. Avoid areas where the local economy is declining or there is only one major employer or industry type. Look out for barren regions in Portugal.

Proximity to Facilities and Services

Properties located in close proximity to major amenities are typically high in demand and tend to outperform the average. Home owners or renters love being able to walk to the bus or train, grab a coffee from the local café and walk around the nearby parks. A good indicator of the “livability” of a location is its walk score. This gives a list of the local restaurants, cafes, supermarkets, parks, schools, community and recreation facilities within walking distance of the chosen property.

The lifestyle appeal of a suburb is a key ingredient for capital growth and yield. Select areas with attractive street scapes, close to recreational and sporting facilities, entertainment, restaurants, cafes, specialty shops, beaches, waterways and parks. Talk to the local real estate agents and shop keepers and find out what makes people want to live and buy in the area. Does it have a family friendly atmosphere, a great “vibe” or some key attractions?

Zoning & Title Types

Before committing to a purchase check the zoning and title of the property. Is the area likely to be rezoned for multi-unit housing in the future? How would this affect property values in the street? Be cautious of buying an apparently cheap property if it is located too close to industrial zoning. Make sure you understand your obligations for owning a property under different titles.

Floor Plan Functionality – Aspect & Light

A property with a good floor plan will attract more buyers and tenants. A good floor plan consists of open plan living and dining areas, kitchen/ meal areas flowing out onto a deck or outdoor area, spacious bedrooms, built in wardrobes, adequate storage space, internal laundries, internal access to car space or garage and plenty of natural light. Older style properties have the kitchen tucked away, smaller bedrooms and disjointed living areas. Modern apartments have some excellent designs used to maximize space and light and combined with balconies provide a very pleasant living space.

Construction Quality

Looking ahead 5-10 years, think about the maintenance that will be required on your shortlisted property. Properties constructed of brick will typically have much lower maintenance. Look for properties that are well constructed and maintained. If you’re buying a house, don’t forget to consider garden maintenance as an expense.

Finishing's & Inclusions

The types and quality of inclusions in a property are also important in determining the overall value. A rental property does not need to have top of the line kitchen appliances to attract the best rent. However, good quality inclusions in bathrooms and kitchens help to create an overall “impression”. When buying off the plan or brand new properties, check the list of inclusions carefully. Make sure light fittings, fans, carpets etc are all included in the contract.

Disclaimer

This presentation provided here offers general advice only.

No direct or implicit recommendations are given in this document. This means that the general advice provided has not been prepared taking into account an individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You should assess whether the advice is appropriate to your individual financial circumstances before making an investment decision. You can either assess the advice yourself or seek the help of an authorized representative through an official tax consultant. StatusRecord Lda {Portugal Real Estate Investments} believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, StatusRecord Lda {Portugal Real Estate Investments} disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise.