Concentrated area v diversification as a strategy

[alexlee]

What do people think about buying properties in one area vs buying properties across many areas / states?

It makes sense to become an expert in one area, and to concentrate your efforts.

It also makes sense to spread your risk across states: lower land tax, less likely you'll get hit by a state-specific issue, and the chance of catching those special booms. e.g. most of my IPs are in Qld, but my one IP in Perth which I bought with a view to diversification caught the back end of the Perth boom).

However, to diversify almost involves information overload. For example, within my criteria (Max $250k - $300k, 3+ bedroom houses on large blocks with future development potential in the capital cities) I've found dozens of suburbs that might be suitable in Melbourne, Sydney, Brisbane and SE Qld. And I haven't done the research on Adelaide yet.

How do people approach this issue of concentration (as Michael Yardney advocates in his book) v diversification?
Alex

 

[The Wild One]

Hi alexlee, that is a question I ask my self regulary.

I have just been concertrateing in the one area. We live in the Brisbane-Gold Coast corridor and know all the suburbs from Nerang to Stones Corner like the back of my hand. This makes it easy to reconise a good buy and to be able to improve the property as well.

When I look at a property, I ask myself, if I was to spend a couple thou' on this would I get all my money back and some more. This is an important part of my due dilligence.

But it is just my good fortune that I happen to be living in a growth area with high rents. I would not be buying in the same area that I live, if for intance I lived in say, Forbes.

In short my answer is yes there is good money to be made in knowing a growth area well. And something else that's interesting. Our best buys have come from interstate vendors !!

 

[rambada]

I believe in concentration in an area and in a niche. For example, I invest on the Gold Coast and in Duplxes or duplex land.
I live on the coast and know the area well. I have looked at Brisbane and elsewhere but as my basic strategy is to add value and hold, I find the distance is a hassle. Also I find the returns offered by Brisbane (yield & cap growth) are not as good as the Gold Coast. Why? I think its mainly because I am familiar with 'my' area. Its not that there are not any good buys in Brisy, its that I find so mant steals on the Gold Coast!! I'm sure someone living in Brisy would be the opposite.
As for my niche. I know what is a development suitable block based on the current town planning act. I have an idea of local market conditions and demands. I know a good priced development block when I see it. I dont do multiple town house sites, just duplex sites. I believe there is a strong demand and limited supply of this niche area.
And its a matter of RAM - I have a limited amount of cerebral RAM that I comit to investing (got to plan holidays, fishing, rugby, etc).
So I have become an 'expert' in my little patch. If you have a look at most professions, eg medical - the specialists demand and make the most amount of money. Not the jack of all trades.

 

[The Y-man]

We concentrate on Melbourne, but diversify across various suburbs. Our theory was that price movements and vacancies tend to happen at differing times between the inner and outer suburbs. We felt this would spread the risk somewhat (at the cost of dropping the "best performance"). We also have various types of residences - from 1BR apartments right thru to a 4BR house.

Cheers,

The Y-man

 

[alexlee]

Rambada, Y-man, do you guys ever wonder whether you could get better returns in other states? i.e. that 'the grass is greener yonder' sort of feeling? I realise that by being an expert in an area you uncover the bargains, but just on my experience with buying that Perth IP in 2004 and watching it jump with everything else in WA.... Greed, I guess.
Alex

 

[willair]

It makes sense to become an expert in one area, and to concentrate your efforts.

Alexlee,
Allowing for all the risks involved then for us over the past seven years
I think it does pay to try and work on a small area,we own properties
on the inner southside in Brisbane from rocklea to west end ..
Even over the past 2 years with the slow C/G that has been in place
those properties have stilled gained over 10% per year and that justs
on the ucv value change on the BCC rates notices..
Prior to that i was in a small SEQ town one hour from Brisbane working
on low priced land and house removal projects but that came to a halt
when the land price plus all the extra fees became too high..
So i guess the answer is for us is yes if you study the area and watch
every sale that takes place in small low priced pockets within the
high priced close areas then i know for a fact that you can't go
wrong..
good luck willair..........

 

[stretchy]

Why not a combination approach? Since I live in Perth, it makes sense to take advantage of local knowledge to scope out bargains and potential value-add scenarios. But if I see an indication of an eastern states boom beginning to ramp up, I will jump in and grab properties to ride the wave. I think its perfectly acceptable to do some buy-and-hold in another state to take advantage of market conditions. It doesnt require too much effort (especially if you use a buyers agent) and will give you pretty decent returns if your timing is good enough.

Even a bad investor made money buying in the late 90's. Why not take advantage of the cycle? You can take a more hands-on approach where the situation warrents it.

 

[goddessk]

This is an interesting question. I have bought in NSW country, Perth city and just outside of Brisbane city. My next investment will most likely not be in any of these places, but it depends on the overall growth of the state at the time. Why? 1. Spread the risk - if one is not performing then the other two may. 2. No land tax anywhere as I am not over the threshold in any given state and lower cost IP's land tax costs are a big slug. 3. I like to diversify my investments. I have a combo of units and houses. I may not even buy residential next time. 4. I chose areas that I thought were performing well year on year consistently based on my research.

I would not buy an IP in Sydney (my home town) as I don't like the way it has performed over the last few years and I believe that there are better areas to invest. Did it take a lot more time to research? Yes a little however I hope that my returns over time will compensate for the fact that I spent a bit more time on it.

 

[The Y-man]

.... Greed, I guess.
Alex

Nah, just being slack.

I think these are my main reasons:
1. I can't be bothered doing the research
2. Melbourne has done well for me.
3. Found other ways to generate wealth and income.

Cheers,

The Y-man

 

[dunnyboy]

Why not both?

i agree with stretchy to a large extent. it is very rare for all the major australian cities to be at the same stage in the property cycle, so there will always be opportunities for profit outside the area in which you have specialist knowledge (ie the place you live in or used to live in etc).

 

[karina]

I try as much as possible to follow the property cycle as well as make the most of any opportunity in any market.

I also adjust my strategy as the market changes.

 

[alexlee]

I think what I need to do is go on a road trip. I'm planning (when I leave London) to take a bit of time off. I'll include 3 weeks to visit Brisbane / GC, Adelaide, Melbourne and Perth. Get a feel for how the city is laid out, drive through areas that I'm interested in, etc.
Alex

 

[Dazz]

How do people approach this issue of concentration

Hi alexlee,

I must admit we fall into this category.

We now concentrate on only two or three suburbs and watch and wait for a cracker to come up, before pouncing on it.

By doing this, we know what is good value....and because we concentrate on "land value" type stuff, the DD needed for the buildings and tenants is reduced alot.

We concentrate on the dirt and all aspects about it. If it stacks up - we jump.

Saves alot of wasted time trolling through doing the initial research of just finding a suitable block of dirt.

 

[Bandita]

Hi Alexlee,

I find it much much easier to concentrate on the city we live in - Melbourne. Our ultimate plan is to move to Brisbane (we met and lived in Queensland for 5 years) and I NEED to live in the warmth, so we watch there as well, but I find it's so hard to REALLY know somewhere until you live there.

I moved to Melbourne a couple of years ago - (originally from Chicago, so knew nothing of it) - and I have gotten to know each and every suburb within a 30km radius of Melbourne by riding the public transport around (when I couldn't work, I would go with my fiance to whichever Chemist he was working and then wander on from there). I've found you can really understand a suburb by the people who get on the public transport. For instance, we now live in a "trendy" area - South Melbourne - most on that tram, at any time to no fail, look like a they work in an office. Head a bit further north to North Melbourne, on a different tram line where I work, most on those people don't speak English at all. Yet both within a 2km radius of CBD. When I really had no clue of Melbourne, I used to ride the train all over the place and get off at random suburbs and have a look around - then later on say to my friends - gosh I really felt like I was in a dodgy suburb today where I just didn't feel safe, couldn't wait to get back on the train to somewhere else - those suburbs included Flemington, Footscray, Frankston, Dandenong - which I now know are some of the highest crime areas in Melbourne. And some of those still may be great investment areas, especially because the govt. is doing alot to change them - you still need to understand the area, and what sort of tenant you will likely have.

While realestate.com and all those sites are great for getting an idea of the price of an area, I would consider it very difficult to know if it's a good investment until you go and get a feel for the area.

Just my thoughts,

Cheers,
Jen

 

[alexlee]

I guess my experience has been a bit unusual. I bought interstate IPs to start with, and after that I've been overseas. Technically I've never lived in any Australian as an active investor. I've never bought a PPOR, and bought IPs mainly on research from a marketing company and my own research on the net.

At the moment, my general plan is to buy reasonably well (based on research, etc, as opposed to buying REALLY well by being an area expert), diversify (across suburbs and cities) and dollar cost average (by buying many properties over time). I take a similar approach to shares: I don't have the confidence to rely on my own research and only buy a few shares, so I buy many shares to diversify.

I bought into Brisbane primarily on the population statistics and a general idea of the suburb. I got lucky on the property cycle, and I guess I'm basing my long term strategy on this: that if you buy around or below the median, spread your investments across areas, you'll achieve the the average long term return.
Alex

 

[Peter Parker]

I've found you can really understand a suburb by the people who get on the public transport.

Yep. Especially with the $2.50 Sunday Saver ticket allowing discount travel to many (Melbourne) suburbs, it's the cheapest research anyone could do.

Having said that, it's also beneficial to travel at other times of the week (eg when schools out and at night) if seriously researching an area. There's more buses during the week and bus drivers are another possible information resource (rock-throwing is a risk in some areas).

Graffiti in public areas is more a consequence of opportunity and bad urban design than socio-economic status (I can show you graffiti-free areas towards Broadmeadows and graffiti-ridden areas in Toorak). However on private shops it's more a concern.

Other checks include seeing if bored schoolkids are vandalising phones or flinging themselves against a wall (the worst instance of this was seen at middle class-ish Nunawading). Chroming in public toilets is another occurrence but I doubt that most purchaser's research extends to such depth! Admittedly these problems may be more to do with age structures than social problems in a suburb and can happen anywhere, but repeated occurrences on several visits might be a flag to be wary.

When examining suburbs perceived to be crime-ridden/poor with derelict unlocked houses, it's interesting to have a look through the windows. If the house contains graffiti/drug paraphernalia/graffiti, then my impression of the area falls.

But if a derelict house has not been 'discovered' by squatters or druggies, then the area might not in reality be so bad after all despite the perception.

Peter

 

[The Y-man]

Yep. Especially with the $2.50 Sunday Saver ticket allowing cheap travel to many suburbs, it's the cheapest research anyone could do.

Though having said that, it's beneficial to travel at other times of the week (eg when schools out and at night) if seriously researching an area. As well as the graffiti (which you'll also find in Toorak) check to see if bored schoolkids are flinging themselves against a wall (seen at Nunawading) or chroming (public toilets). Admittedly these sights may be more to do with age structures than social problems in a suburb, but still add to research.

When examining suburbs perceived to be crime-ridden/poor with derelict unlocked houses, it's interesting to have a look through the windows. If the house contains graffiti/drug paraphernalia/graffiti, then my impression of the area falls.

But if a derelict house has not been 'discovered' by squatters or druggies, then the area might not be so bad after all despite a prior bad reputation.

Peter

Spiderman,

You must keep in mind that not everyone can hang off the ceiling and observe these things like you can..... us normal people have to flee on foot you know....

Cheers,

The Y-man

P.s. here's a pic more suited to your avatar....

 

[Ruby]

When examining suburbs perceived to be crime-ridden/poor with derelict unlocked houses, it's interesting to have a look through the windows.

Does that also include climbing through the windows Peter?

Ruby

 

[Peter Parker]

Spiderman,

You must keep in mind that not everyone can hang off the ceiling and observe these things like you can..... us normal people have to flee on foot you know....

LOL though when such observations can be made (or are pointed out by others) during one's work or travels it's hard not to take some of it in!

Peter

 

[Kennethkohsg]

I guess my experience has been a bit unusual. I bought interstate IPs to start with, and after that I've been overseas. Technically I've never lived in any Australian as an active investor. I've never bought a PPOR, and bought IPs mainly on research from a marketing company and my own research on the net.

At the moment, my general plan is to buy reasonably well (based on research, etc, as opposed to buying REALLY well by being an area expert), diversify (across suburbs and cities) and dollar cost average (by buying many properties over time). I take a similar approach to shares: I don't have the confidence to rely on my own research and only buy a few shares, so I buy many shares to diversify.

I bought into Brisbane primarily on the population statistics and a general idea of the suburb. I got lucky on the property cycle, and I guess I'm basing my long term strategy on this: that if you buy around or below the median, spread your investments across areas, you'll achieve the the average long term return.
Alex

*************************************************
Dear Alex,

1. Like you, I am also investing from overseas initially.

2. Now, I live in the same Anchorage Estate in Rockingham, WA where all my Perth properties are located.

3. The key reasons why I have "concentrated" all my Perth property investments in the partricular Anchorage Estate, is that I believe in my own research and forsee at least 3 years of continuous good capital growth rate for this particular Anchorage Estate, covering the Rockingham-Shoalwaters suburbs in view of the number of recent infrastructural developments/projects taking place from 2003 -2007 period.

4. Personally, I have experienced and saw how the suburb's 5 years average annual growth rate have risen significantly from less than 11%pa. to more than 19%pa today.

5. I am also happy and proud to say that I have learnt a lot and know this Anchorage Estate and the Rockingham suburb well enough to be very confident and knowledgeable about the area in general, despite being a new temporary resident here and about the latest land/house sales and resales in the same Anchorage Estate, etc.

6. I'm wondering if the Rockingham-Shoalwaters will be able to provide me a good investment ground such that I can begin to concentrate and specialise in these particular 2 suburbs for the rest of my property investing career , just like Mr Rory O' Rourke, his son, Jarrad O' Rourke and his O'Rourke Realty has specialised and grown together with the Scarborough (WA 6019) suburb in particular, continuously, for the past 20-25 years period.

7. Having said that, I do also diversify and invest elsewhere like Yanchep and, in particular in the Goldcoast property market at the Burleigh Head-Burleigh Waters (QLD 4220) - Stephens (QLD 4227)-Robina (QLD 4226) areas.

8. I am also presently exploring into investing into the Sydney and Melbourne property markets in late 2006/ 2007 period.

9. The main reasons for my diversifying my property investments is to exploit the different property cycles/timings in each of the States as well as to spread out my own investments risks across the different States for safety reasons.

10. For your kind update, please.

11. Thank you.

Cheers,
Kenneth KOH