My professional life has been all about “the numbers” for more than two decades! So, as an accountant and financial advisor, it pains me to say that numbers are not always right!
Numbers are factual, verifiable, logical and the ‘robustness’ gives me a lot of confidence. However, when it comes to investing in property, a focus on numbers alone can cause very costly mistakes.
Evidenced-based approaches are rooted in simple math
I am a strong believer in only employing evidenced-based investment methodologies. That is, only invest when there is overwhelming evidence that the methodology will generate the investment returns you desire. If there is no evidence, then it is too risky. You may as well throw darts at a dartboard.
Of course, normally we look to math to verify the evidence. Therefore, I appreciate that me stating that numbers can’t always be trusted may be somewhat contradictory.
Why can the property data be wrong?
It is very important to understand what has driven the data, because not all data is reliable or meaningful.
Suburb median data is a good example of this point. Sometimes I see advisors or journalists reporting median house price growth in a given suburb, often to support an investment case. But it’s important to understand the data before drawing any conclusions.
Was the volume (number) of sales statistically significant? Were the properties that sold during the period representative of the property type you are considering investing in? Were the results driven by a once-off change such as the release of more land, major developments or the gentrification of the suburb?
Just because a suburb has generated price growth of 9% p.a. over the past 5 or 10 years, doesn’t necessarily suggest its future growth will be in line with this.
Asset-specific property data
Property specific historical data can also sometimes be unreliable.
It is important to ascertain whether past sales were representative of the true market value of the subject property. Situations such as sales between related parties, transactions in very buoyant markets (i.e. if purchaser overpaid), if any capital improvements were made to the property during the period and so on. These can all affect the implied capital growth rate.
Not every sale perfectly reflects a property’s intrinsic value, so care must be taken.
Property data can over or under inflate historic growth rates
Data might suggest that a particular suburb or geographical location is primed for future growth, but if the data is wrong or unreliable, you could make a very costly investment mistake.
Similarly, individual property growth data might suggest a property is a good or bad investment, but the reality might be different. You must understand the story behind the numbers.
And this is where the art comes in…
You should never make important property decisions on data alone. The data only gets you part of the way. You must compliment that data with local area knowledge and expertise.
Having many years of experience in a geographical market allows you to understand a market better and appreciate any changes in value drivers. This is where the “art of property” plays an important role. It gives context to the data and allows you to decide on its relevance.
Leaning on someone else’s experience
There was an industrialist whose production line inexplicably breaks down, costing him millions per day. He finally tracks down an expert who takes out a screwdriver, turns one screw, and then – as the factory cranks back to life – presents a bill for £10,000.
Affronted, the factory owner demands an itemised version. The expert is happy to oblige: “For turning a screw: £1. For knowing which screw to turn: £9,999.”
Investing in property requires several hundreds of thousands of dollars. Getting it wrong can be very costly in terms of lost money or opportunity cost. Engaging an expert with several years of experience will help you avoid making a costly mistake.
It is for this reason that it is critical if you are going to engage the services of a buyers’ agent, they must be an expert in their geographical market. Some buyers’ agents will buy property all over Australia but to me, that just feels too risky and waters down the very value that a buyers’ agent should provide.
There is overwhelming evidence that using the right buyers’ agent does minimise the likelihood of you making a costly mistake.
Reviewing property performance each year can be meaningless
I have written many, many times that reviewing your investment’s performance is very important. However, with property, that can be difficult to do as performance is almost never evenly distributed i.e. straight line. Just because your property hasn’t delivered any capital growth for a few years doesn’t necessarily mean it’s a dud asset. Again, in this situation local market expertise is critical – even more critical than financial analysis.
It’s both art and science
As I wrote in a blog in 2016, investing in property is part-art and part-science. Trawling the internet for data is an important step in completing investment analysis. However, it is only one of many important steps. Beware of being sucked into analysis alone. There is no substitute for practical experience, in many vocations including property investing.