Simon Loo is an expert property buyer’s agent and director of buyer’s agency, House Finder. He has built up a wealth of knowledge over his many, many years of working in the property industry. We are lucky enough to learn some of his expert strategies and listen to his advice on the importance of property prices and areas.
Join us as we delve into today’s topic of how the property and the area that you buy into correlates with the ability to consistently have your property tenanted. We discuss the areas you should be focused on, a certain type of property that has seen a significant downturn in demand, how the COVID-19 pandemic has affected what people are looking for in a property, and much much more!
Tyrone And Simon Loo Talk About Sydney Property
Diving into this topic, we discuss the current trend that Loo is seeing specifically in the Sydney property market.
In the world of property, there's so many things you can do. There [are] so many types of properties you can buy, you know, not even just physically, but location. You can buy in regional areas, capital cities; you can buy in different states, and the types of properties you can buy could be units. They could be houses, townhouses, villas; they could be off the plan, house and land packages. They could be commercial properties, development sites. Like there's so many different things you can do. And every different person you speak to will have their own opinion on what's, you know, the best performing and the best types of properties.
But I guess today, what I wanted to talk about is the type of properties that will help you ensure that it goes through the time test. The test of that property being consistently tenanted, you know, causing the landlord as few headaches from both a vacancy or a tenancy perspective and from a maintenance perspective.
Also, one of the biggest things that I focused on as with my own portfolio and as a buyer's agent is I emphasise the fact of avoiding units. Now, units in Australia at least are never going to be as sought after as an accommodation option than houses, standalone houses with their own yard. The culture in Australia is, you know, people enjoy their own space. They enjoy outdoor living. They enjoy doing barbecues and, you know, having people over and all that kind of stuff.
Now in Sydney, literally in recent weeks, recent months, there's been a significant downturn in rental demand from units, especially units in where there's a lot of support like, you know, let's say, for example, areas like Mascot and Zetland and those kinds of pockets and, you know, maybe even areas like Rhodes, where there's just a lot of units, you know, built by Mirvac and Meriton and those kinds of unit hubs.
Now I've noticed in these areas, a lot of the landlords are having to drop their rent significantly. And when I say significantly, I'm talking, you know, 30%, 40% in some cases to be able to, you know, even attract inquiries. A lot of these units are not even rented out yet still. And they’re throwing ridiculous incentives as well. Like, you know, two months free rent, you know, three months free rent, furnished, you know, all these kinds of things. And they still can't get the units rented out. And the bottom line is it just appeals to a very limited amount of potential tenants out there. Only certain types of people that want to rent these particular properties. A large chunk of that are students or people that might be married, they might be, you know, new to the workforce.
What The Majority Of Australians Are Looking For
Loo delves into why there has been a significant drop in demand for units and provides some tips on what to be looking for in a property.
You've got young people who, you know, maybe used to live with a couple of mates, but because of COVID, maybe a bunch of them have actually moved back into their parents' houses. So, the demand for this type of product is extremely low. And the only way that they can attract a tenant to live in these units wherever it is, is really by reducing rates and reducing rent. It is one of those things that, you know, can really impact a landlord's portfolio. Because, you know, having negative cash flow or having less cash flow over the long term is hugely detrimental.
It's not something that can be sustained over the long term. So, definitely, you know, when you're choosing a property to buy, now even more than ever, even before COVID, only focus on houses. It's really important to focus on property with its own land component. It's really important to focus on houses that are private to separate from other people because those are the kinds of properties that have the biggest demands. Those are the kinds of properties that affect the best type of tenants, which are going to be families with kids. So, you know, buying that type of property is super, super important.
I think, also, the characteristics of the properties are also extremely important as well. So, you know, you'll see here all the time now, you know, nowadays that there's a lot of people out there talking about, you know, dual-living properties and properties that have been cut up into an abnormal number of rooms to increase rent, to maybe lease out to two separate tenants.
I think those were risky to begin with, but now more than ever, you know, the demand for those properties are probably quite low. So, you know, the type of properties that I like to focus on [is] the type of houses we talked about. Only buy houses. But just keep it really simple at the end of the day—three or four bedrooms, you know, living area, dining, kitchen, just a very typical, I would almost say vanilla house. Because those are the kinds of houses that most people are after, you know, to live in. They don't want any quirky things that are, you know, if it requires a lot of stairs to get up and down again, that's a bit of a negative factor with a rental property.
You know, if there's a lot of maintenance ensuring that the property is structurally and physically sound and, you know, ensuring that the property is in a very presentable, a very clean and tidy state and safe as well. I think that's also important. So, those are some of the characteristics that I try to incorporate when I'm buying properties nowadays for clients and for myself as well.
It's really, really interesting that you mentioned all those because I guess it gives you good criteria or a guideline because it's very easy with thousands and thousands of houses out there to choose from, which one do you choose?
And sometimes we all fall back into choosing via emotion rather than choose based on criteria and guidelines and facts. And by doing that, it doesn't really help the situation because if you're looking for an owner-occupier, different story, you will definitely be choosing things that you will like, that you can picture with the kids in there, yourself and so forth.
But when you're looking at an investment, we're coming back down to affordability. You have got to make sure that you are choosing it in a market that is suitable, that will attract the most tenants, rather than say an upper-end market where properties are worth like $2 million, $3 million, $4 million, $10 million—which completely attracts a completely different market.
And especially in tougher times, that kind of drops off eventually. And that makes it really hard. Just as you said, there's a lot of apartments on the market, and there are only a certain amount of students—especially a lot of them that were from overseas have now been restricted from coming back into Australia during a pandemic like this. It's going to be very, very difficult to rent out to them because they're not around.
And then who do you fall back to? You fall back to the local market. And there aren't actually very many students who are very well-off to be able to afford them. As you said, they go back to their own parents' place and stay there just to, I guess, save a few dollars here and there. But it's quite challenging in that sense.
But then again, if you're not looking at that market, there may be the baby boomer market. But, I think, that they still will be looking at townhouses instead because they still want a bit of space, but not tight into [an] apartment-living type of style. And that's where demographics and so forth is changing over this period of time. Because, obviously, we're seeing a lot more medium-dense housing compared to, you know, higher-density housing around the area.
The other thing I think is worth mentioning as well is, you know, tenants are very smart people. I think as landlords, we sometimes like to see tenants as just, you know, a factor that will assist us in reaching our property investment goals. But tenants like, you know, even if they're renting, let's say, you know, previously you might be renting like a two- or three-bedroom unit, but then you see the market falling, you know, you see the price of the units around you, from a rental perspective, dropping as well.
And then you immediately think to yourself, ‘Am I getting the best value out of this product, or out of this property that I'm living in that I'm renting or is there something better out there now?’. In most circumstances, people always think upwards. And I think some tenants are not immune to this, but you know, they're always thinking what's next.
Like, how do I improve from this? So if they're suddenly thinking, let's say, for example, they're paying $600 a week in rent to rent a typical unit in Sydney, but then now they're looking at the market and they're realising, you know, for $600 a week they can actually get into a townhouse now or get into a villa or get into a house, you know, or get into a nicer, bigger unit. Then they're going to be looking at those kinds of options and they're going to be comparing it to what they have. And I think at the end of the day, you know, it plays into, again, the fact that, you know, if you have a product that most people want to get into, then I think it's going to help you a lot in the long term when it comes to a rental perspective. Location is key.
You mentioned buying, you know, properties that people are buying potentially emotionally as an investment. If you do that nowadays, it's even more damaging potentially than before COVID because, you know, buying emotionally, a large part of that is buying into what most would consider ultra blue-chip areas—as expensive as you can get. Now, the demographic for people that are buying those properties and for people that are renting those properties, you know, are generally high-income earners.
And high-income earners at this present time are some of the people that are getting affected the most. They might be running businesses that have taken a massive hit. They might have a really large share portfolio that's also taking a bit of a hit. Well, maybe not recently; it's gone a bit crazy. But in general, you know, you've got to look at these kinds of elements, you know, as to what most of the population is after at the end of the day.
Looking For The Best Property Type To Invest In
We discuss Loo's opinion on the type of property you should be looking to invest in and the importance of the area you buy.
We talked in previous episodes about buying affordable housing and affordable areas. That still rings very true. I think sticking to houses is extremely important. If you're in a built-up large population city—like Sydney and Melbourne—, then yes. You know, townhouses and villas and duplexes and things like that are definitely viable options. But if you're buying in southeast Queensland or Brisbane, you know, where the price of a house compared to a townhouse or a unit from both a buying and a rental perspective is an extremely small gap, definitely go for the house with land.
Sticking to built-up areas—again, super important. I think there's been a lot of hype about regional areas as of late. Again, I don't have a crystal ball, so I don't know what's going to happen in terms of growth. But it only makes sense to buy in areas or to focus on areas where there is consistent population demand.
If you do experience a vacancy or if you have to sell it one day, if you have a house and unfortunately, you know, a few years down the track, you come into some unforeseen circumstances personally, and you have to let it go—you don't want to have to either wait around for months and months and months for the right buyer or drop your pants in terms of the property prices. So, I think it's super important to also consider how sellable the house is—and you need to take this into consideration when you're buying it.
If I'm buying a house—if I had to sell it the next day—, is it going to be a huge issue? And if you buy like a really quirky house, if you buy a house that has, you know, a lot of investment credentials perhaps—when I say ‘investment credentials’ I mean things like having a lot of different rooms or having like a dual occupancy alternative, like things like that—, you're not appealing to owner-occupiers when you sell it. You're only appealing to other investors which are very limited in these times. So, that's super important.
Just one last thing as well: I wanted to mention the trend of working from home. It has been accentuated with this whole COVID-19 scenario. So, you know, working at home options—even though it's safe to go into an office, I think there's, you know, you see articles and you hear a lot now that, you know, a lot of companies are having to adapt to that kind of work lifestyle nowadays.
So, a lot of the things that I've been focusing on for clients currently are properties that have that potential or that extra area within that house that people can set up their individual home office, you know, away from the other property.
Now, you don't really get that with a two-bedroom unit. You've got that extra room, but it's not really separate for people to be able to work completely away from their family or from their kids. So, I think when you have a property that has, you know, a dedicated area with space where people can set up a proper home office, I think those will be in significant demand as well.
The Impact of COVID-19 On The Property Market
More people have been forced to work from home due to COVID-19. And Loo shares his perspective on how it will impact people buying in regional areas and built-up capital cities.
There's a lot of people talking about it now because the need to work in an office is not as important as it was before this whole pandemic thing started. Moving to a regional town or moving into maybe like a seaside location is going to be ‘the norm’. But—and this is very big but—I think the reality is most people romanticise that kind of lifestyle, but it's not like there's going to be like a dramatic shift from people wanting to live in a built-up capital city area to more regional areas just because they can, or just because they can afford to.
Because, at the end of the day, convenience, you know, family and friends, lifestyle amenities, infrastructure, like you said—I think all of those are at the core of what most people want from a place to live in. Believe it or not, I think a lot of people also think working from home is great and it does have its benefits, but, at the same time, there are a lot of people that actually desire to work in an office.
They actually want to get away from home, and you have to go into a proper office, you know, if not for the ‘professional feeling’, you know, ‘this is my place of work’, but really just for the social interaction of working with co-workers and colleagues and things like that. I think once things calm down a little bit with [the] whole COVID situation, I think people will still return to offices as a majority. But definitely, the option of working from home is going to be increased as well.
There are more opportunities to buy because of the amount of distressed sellers due to the pandemic, and Loo provides some tips on what to focus on to ensure you make the best possible investment.
I think at the end of the day, people prefer to actually see and hug someone and take someone's hand in real life. I don't think that social interaction will ever diminish. But bringing it back to property—that's what I've been looking at for my clients. In recent times, my focus has always been below-market value, distressed properties, which we're seeing a lot of. People that really need to sell, which is good from a buying perspective. We're finding properties that have really good cash flow.
We're finding them houses that you can add value to. When I say ‘add value’, meaning that, you know, you can add extra rooms and extra bathrooms; you can make it worth more by spending money into it. That's the main criteria that I focused on as well. But, you know, on top of that, what we're looking for now are elements within that property or within the house that will enable people to work from home to run home offices. They have elements that will retain and keep good tenants in the long term. And if those tenants were to leave or if they decide to not pay rent or anything like that, it's not going to be a huge challenge to find a replacement tenant.
So, you know, looking at these elements I guess, in summary, focusing on built-up areas, focusing on areas where there's a lot of demand for people to live in, you know, mostly capital cities or within sort of 20 kilometres, 30 kilometres of a capital city. Focusing on houses, you know. Don't buy units, if you can always focus on a house that you can control the land underneath it.
So, even sometimes, when you buy a villa or when you buy a townhouse, you might have to pay body corporate. Like, I would still probably avoid that if you can afford to. And ensure that the house that you buy isn't anything wacky or anything extraordinary. Just ensure it's like a simple three- or four-bedroom, you know, family-friendly, safe, clean, tidy house, you know, that you can add value, that you have that option to make cosmetically better in time—but at the same time, still livable and rentable from day one. I think that's super important.
I think the age of the property is also quite important, you know. Try and avoid properties that are super old because it could be a pandora's box of maintenance and those things. In a normal market, it might not be that much of a problem, because you might consider it as a renovator or something that you could easily flip. But during times of uncertainty, buying a property and flipping it, or buying a property and blindly expecting the house prices to go up, is not a very sensible approach.
So, you know, ensuring that the houses are in good condition is also super important. But again, all the fundamentals still make sense. So, you know, close to schools, shops, parks, transport, away from power lines and main roads. And avoiding things like flood zones, bushfire zones, like all those factors still need to be super important. And, I mean, those are the kinds of properties that we'd be buying for our clients. Ensuring all those kinds of factors do come into play.
The Importance Of The Small Details
I just want to add one other thing as well in regards to actually buying land. I guess we're very ‘pro-land, purchase housing’ type of investors. And I guess the reason why I want to sort of just emphasise that a little bit more—just so that people understand why—[is] because there is value in the land.
So, if down the track you find that the land itself can actually add more property to it—such as, maybe, a granny flat in the back if there’s space for it, or maybe you could subdivide it and turn it into two blocks, or even just knock it down in the future and turn it into a duplex with dual occupancy—there's opportunity to do all those types of things.
Obviously, you're not going to do that immediately because you want a tenant to be in there to cover and pay the rent and so forth to pay it off. But once you’ve paid it off and it's secure in your portfolio, and you've got this asset, there are so many opportunities that you can do with it.
And that's what I always try to look for is when I'm purchasing a property, I want to be able to say, ’Okay, in future, if I want to add value to it, is there potential or opportunity to do that?’. And I would obviously do my due diligence before that. But if there is, then there's a chance that you can do something to it later on and increases its value straight away.
Granny flat is a really good example. I would say 9 out of 10 of the clients that I speak to ask for granny-flat potential. But granny flat potential—you have to ensure there's like a lot of nuances with the block and the type of property that's on there already. Whether it's suitable, just because it meets the requirements of the 450 square metres and, you know, within 3 metres set back from the rear boundary, like all that kind of stuff that you would normally find as part of the requirements to build a granny flat; you need to ensure that it's got its own access.
You know, does it have enough frontage so that you can access the granny flat without impacting the front house? Can you fence it off from the front house so it becomes literally two separate properties? If you build this granny flat, will it affect the front house too much?—meaning that, maybe, before the granny flat that house or that property, you know, might have like a decent-sized backyard, but once you chuck on the granny flat, it's got zero yard on the front house. And it can really devalue the overall property if that were the case.
So, there [are] all these little things that we need to consider as well. Just because sometimes I see this a lot—like, you know, like selling agents when they sell a property, if it meets the requirements of being subdividable or [have] granny-flat potential to advertise it as such. But, you know, just because you can, [it] doesn't mean you should. I think that applies to property quite a lot. So, you know, if it is subdividable, if you can add on that granny flat, can you do it sensibly? Can you do it so that it does not impact the value or the desirability of the property itself?
Because, sometimes, I do see people chuck up these granny flats, but there's no way to access that granny flat except for through the main house. So, in [the] future, if you did want to rent them out separately, if the council permits and all this type of stuff, you know, no one's ever going to rent a granny flat where you can't get to it or you have to walk down a very narrow laneway to get to, if that makes sense. There's a lot of factors to consider.