I get asked a lot of questions during my seminars and workshops, but the most frustrating one for me is when someone asks me about a specific development, a specific builder or even a specific location… Their question invariably goes like this…
“Sunil, is this a good deal?”
And I always reply with…
“I’ve no idea”.
Well, honestly, I don’t know and here’s why.
Property investing is all about comparisons and you can’t compare one investment unless you have at least one another (and preferably many others) to compare it against! Comparisons are so powerful.
The power of comparisons.
Let’s look at a simple example…
Let’s say that I am selling bananas for $10 each… Is that a good deal?
Well, your first reaction would be that $10 for a single banana is expensive… right?
Why did you have that reaction? Well because you know that you can buy bananas cheaper. In fact a lot cheaper! So in your mind, you were making a COMPARISON against what you know.
You would most likely reject my deal on the banana because you were able to make an INFORMED decision!
It’s logical, isn’t it!
In fact, my own father, when he wanted to buy something for our house would often spend days and days comparing prices in different shops, and then when he found the best, and that usually meant the lowest purchase price, he would buy it!
It’s scary… I’ve seen people spend more time researching their next mobile phone than they have spent time researching their next investment
Why is this?
Well, buying bananas and phones is a little different from buying houses… right?
When you’re buying a phone, you’re just looking for the price… you can go to retailers who all have the same product and find the “cheapest” deal… because the product is the same with all the sellers.
However, when you buy a house there are SO many variables involved apart from the price tag!
In the property market… no two properties are the same! (Even the same builder cannot build 100% identical properties), so the key to finding good deals is having the ability to have a system that helps you break down each investment to give you a level playing field to work with… and that makes the choice easy.
For example… suppose that you gave each investment a score from 1 – 100 (where 1 was bad and 100 was GREAT), all you would need to do is sort your list, and buy the property with the highest score!
Well Not so easy.
Because the question then arises…
“How do you score each property?”
Let’s look at some of the factors that would affect the score of any property
- The price per sqft,
- The size of the property,
- The size of the development,
- Which financial institutions have approved the project,
- The facilities on the development,
- The amount of Inward investment in the area,
- The quality of construction,
- The credibility of the builder,
- The location of the development,
- The proximity of the development to friends & family, (more on this later)
- The view from the property,
- How long until the property is completed,
- The potential rental income of the property,
- The potential demand for rental,
(I’m sure you could think of hundreds of factors if you had to)
So which factors are important?
Well it’s a combination of all these, but that leaves us with
A lot of investors get “put off” with all the analysis that needs to be done, and tend to invest with their emotions… I have seen people say “I like the developer” or “I like the design of the property” or “the builder has a good track record” or as I mentioned earlier, it is close to family and friends. Some investors get really attached to single factors.
I don’t like investing with emotion… like to invest with logic.
The ideal investment is the one that “scores” the highest on all factors, but as you can imagine, that utopian investment is a very rare beast unless there is nothing to compare it against of course!
So you need to decide which factors are important to you, and for each person, it’s going to be different. It’s important to understand that what is a great deal for one person may be a terrible deal for someone else. As you may have gathered I personally would weight proximity to friends and family lower than some other investors, it’s not that I am right and they are wrong it’s just that we are different.
Not only that, you need to decide which factors are more important than other factors and then apply a “weighting” to those factors.
So how should you decide which factors are important to you?
The factors you choose, and the weighing you apply to each factor will depend on your answers to the following questions:
- What is your reason for the investment?
- What is your attitude towards risk?
- How much money you have to invest?
- What is your current cash flow position?
Each of the above could radically change which factors you choose and how you weight each of the factors.
Once you have decided which factors are important to you, and which of those factors you are giving more importance too, you can then go about researching and “scoring” each property!
Building a list!
One of the most important things to do is to build a list of properties, and have columns for each of the factors that you chose. Filling up the list does take time, but it’s a crucial step in property investing.
Scoring each property on the factors is going to be down to you in most cases, where you might say property A scores a 10 on one factor, while another property might only score a 5. What exactly is a 10 or a 5 – only you can decide.
Of course, if you add weighting to a factor then you’ll have to increase it by the weighting.
For example, if you think that location is important, then you can multiply your score by your weighting
You’ll then need to total up each property individual weighted factor scores to give it a total score. And then hey presto! You have a way of finding the “best” deal … for you! Sort the list… and the “cream” rises to the top.
When you have a lot of properties on the list (my first list had over 400 properties)… you’ll be in a strong position to invest, and you will KNOW logically which is the best property to invest in.
Researching and building a list of properties takes work… hard work, but the rewards are priceless!
However not taking that final step and BUYING the property of your dreams could result in all that hard work being done in vain so it’s really important to TAKE ACTION!
Just remember, there will always be risk! You can never get the risk to 0. But by doing the right research you can get it pretty close!
Believe me, you get a warm feeling when you know which are the best properties to invest in. Doing the analysis in advance ensures that you minimise the risk of sleepless nights is dramatically reduced.