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Demystifying Market Research In Just 6 Steps

Mar 29, 2008
How to make rock solid property deals by listening to the market

There's no such thing as a natural born property developer. Those of us who do it well have worked very hard to get where we are. But you can get here, too, if you're prepared to roll up your sleeves and do your research. This article is your step-by-step guide to laying a foundation of knowledge upon which you can build a lucrative, independent career in real estate.

All you have to do is follow these steps and you'll already be ahead of the curve.

Step 1: See the big picture
Before you start checking out deals, spend some time researching demand. Take a look around you -- from your town to your country and in between -- and ask yourself where the demand for housing is and where it's coming from. (NB: For the time being, I'm only discussing residential property; the rules for commercial deals are very different.)

I'm going to show you some demand factors and use my own surroundings as a case study. Read on, then fill in the blanks for your own region.

+ Population increase: Australia has been witnessing a 1.4% growth rate. That means an ever-increasing demand for housing.
+ Immigration: Like most other Western countries, Australia has a low birth rate; its population increase is caused by immigration. The Housing Industry Association (HIA) estimates that, for every ten thousand immigrants, there's a demand for three- to five thousand new houses. You do the math.
+ Migration: An increase in interstate migration drives localized population growth. Recently, Western Australia and Queensland have experienced rapid growth due to mining booms. These changes also cause demographic shifts to more lifestyle-oriented areas.
+ Age: An older population equals a higher demand for certain property types. Baby boomers increasingly require associated living arrangements, downsized homes and retirement accommodations.
+ Affordability: Due to affordability problems, Australia is currently seeing a greater demand for cheap housing.
+ Demographic Trends: This one's more of a wild card, as it depends on the tastes and habits of the population. There's the semi-rural drift known as "Tree Change" (see my first newsletter), there's the proliferation of singles, divorcees and couples starting families later in life -- and many other factors that create demand above and beyond population growth.

Step 2: Choose your market
Now that you've educated yourself on a macro level, it's time to tighten up your scope and decide what kind of area you want to become an expert on. Here's tip that will save you lots of time: Pick an area or market that you understand. Remember my friend the old cottage specialist? He chose that market because he belongs to his own target demographic. [DOUBLECHECK W/ DL. ALSO, DOES THIS FRIEND ALSO LIVE IN A COTTAGE?]

So work with a market that you already know, whether that means targeting a group with which you have things in common or choosing an area that you've lived in. That way, you'll already speak the language. You'll understand the spirit of the market, which will go a long way toward helping you understand its more complicated factors.

As you narrow your search, keep in mind the old saying about the three most important factors in real estate: Location, location, location! Of course, if it were that simple you wouldn't be reading this. And your research will help you realize what constitutes a great location.

Step 3: Gather your resources
Get ready to hit the books! You'll need to know your chosen area's selling prices and rental prices for the last year, and a lot more. This research will allow to establish a fair value for your own deal, once you find one.

But where to find this information? Start with your newspaper's weekend real estate pages. Mid-week, keep your eye on asking prices and note which properties sell fast.

Then you can move on to more technical sources. You can order ad hoc reports from RP DATA and the Australian Property Monitors (with RP DATA, you can also acces the same live stream that real estate agents use). Annual reports and industry articles will round out the picture.

By taking this step, you're moving from "gut feeling" to "gut facts."

Step 4: Do your homework
This is perhaps the heaviest step. You've narrowed down your focus, loaded up your toolbox, and now you're going to roll up your sleeves and dig around till you know your area inside and out.

As you follow the web resources and papers, keep these three indicators in mind:
1. Median price: The price at which half the homes in the area are more expensive and half are cheaper
2. Rentals yield: Typically 3 - 5% per annum of the property's value. Even if you're not interested in renting out your future property, this figure is your canary-in-a-coal mine: when yields get too high or too low, you'll know that capital values are getting out of whack.
3. Vacancy rates: A measure of the percentage of vacant, available rental properties. 4% is high, while anything below 2% is considered very low -- a landlord's market.

These are the three big considerations that will help you understand your market in greater detail. There are, of course, many others, depending on your target market. I'll rattle off a handful of them:
+ Local economy: In general, go for maximum diversity. A one-company town is at the mercy of its one company. I prefer capital cities. Over the long term, money tends to gravitate that way.
+ Government controls: Look out for regulations that might hobble you, like restrictions against high-density or even medium-density housing.
+ Transport infrastructure: Does your area offer good public transportation?
+ Schools: If families are your target market, make sure there's a diverse selection of public and private schools in your area
+ Medical services: Are there hospitals in your area? Near by? Miles away?
+ Cafe strip: For the trendy demographics.

Just two more steps to go!

Step 5: Get to know your contractors
Builders and contractors are a vital part of your team. So get out the phone book. Ask around. Make sure you find contractors who do good work at a reasonable price. Price and value will become a big issue once you bring these guys into the picture. (I'll discuss builders more in this issue's next article.)

Step 6: Take it to the bank
In this final step, you'll take everything you've learned and shape it into a plan. By now, you know how much a property in your chosen area should cost. And you've talked to enough contractors to know the price of your ideal renovations. You even have a ballpark selling price. Now it's time to take these figures, along with your financial records, to a good broker or bank representative. They'll help you research your financing options based on your current status and the viability of your property goals. You can save yourself lots of time and heartache by making sure your goals are rooted in your economic realities before you go to the bank -- and before you overextend yourself with unwise loans. But if you've done your research and stuck with the fundamentals, you should be able to proceed without ever worrying about collection agencies banging on your door.

Conclusion
Needless to say, market research doesn't happen overnight. But with determination and patience, these six steps will prepare you to start bidding on properties -- the right properties that will turn a profit for you!
About the Author
Daniel Lock is a property coach, consultant and development manager. Offering results-driven coaching and consulting to people wanting to make money through property development. Find out how you can make serious money safely in Property Development at http://PropertyDevelopmentProfits.com/blog/
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