Data Analysis Techniques: The Algorithm To Property Success
Jeremy Sheppard, director of research at Empower Wealth, has created an algorithm determining where the market will grow in the future. Merging computer programming with property, learn from Sheppard and follow the ups and downs of his property journey – from tenants creating $13,000 worth in damage to simply taking his eye off the ball.
The fist-punching-in-the-air moment where Sheppard realised property really worked as an investment will inspire you in your own journey, as we uncover his story from humble beginnings as a data geek and evolving into a young, well-informed property investor who’s blazing the trail to disrupt the industry.
Working for a company that provides professional advice for investors on how to build a wealthier future, Sheppard describes himself as a data geek.
I’m the director of research at Empower Wealth. So what that means is I’m the guy that’s buried in data every week, looking for capital growth hotspots that suit our client’s budget. But that’s pretty much it, just a data geek really – capital growth data geek.
I love that and it’s important because the data that you put together can either help people make a really informed decision or turn I guess different deals away. So it makes it very, very concise so that they can take action on what they need to do to fit within the budget.
Yeah, it’s extremely important. I mean you pay hundreds of dollars to find out about building and pest inspections before you buy a property; I mean you wouldn’t do without that. And I think just having a look at some of the data, those sort of reports, they’re so cheap and they make such a difference to an investor’s future with a property – it’s sort of crucial kind of stuff.
And it’s so easy to become biased about particular suburbs – and looking at things numerically helps us avoid that sort of bias. So it’s handy for a number of reasons.
In his role as research director, what does he do on any given day?
There’s a combination of things: so, first of all, I spend a lot of my time doing product development, so I’ve got a couple of new products, new websites, that will be coming out in the next year or two and then obviously keeping existing websites running. And the key focus is to make sure that clients are fed the right property to invest in. Now I don’t actually pick any properties, I don’t even go down to street level, but what I’m doing is supplying our buyers agents with a list of suburbs that I recommend for a range of prices that suit their clients. Once a month we meet together and I do a presentation, I say, ‘Here’s what’s happening in the market, here’s what’s happening around the country. This is business as usual, this looks interesting, here’s something more to watch and we should probably stop getting into this market and start getting into that market.’
So it’s those sorts of things – and my analysis is really just all the numbers, the numerical stuff, so I don’t do any field research but the buyer’s agents cover that side. So it’s sort of a merger of fundamental research and technical research that we do once a month. And then they’ll go off and pick locations that are a combination, they have a good numerical, good data background and they also have something else that they’re aware of that’s going on that’s good. And so it’s that intersection of fundamental research and technical research that we do each month.
While the majority of Sheppard’s accumulated data is directed towards buyers agents, there is a secondary website that was created for individuals who want to do the research themselves.
We often get people just wanting to know about locations, but my primary objective is to supply the buyers agents with those suburbs and something that suits their clients. So I don’t actually have a client-facing role, I have a computer facing role – a data facing role – and it is all about the number crunching. But it’s possible, I mean we kicked off this website around July of last year, Locations Score for some of the investors who want to do it themselves, they don’t want to hire a buyer’s agent.
And we can’t service all of Australia, obviously. So we thought, ‘Well, let’s give away some of the data,’ and that was the purpose of Location Score. They can do some quick, easy research, not the sort of in-depth stuff that I do every month but at least enough to avoid buying in a danger zone – you know, little flag warnings trigger alarm bells, that sort of thing. So we do provide some of that data for the general public, but most of the nitty-gritty I’m working on day-to-day is for the buyer’s agents.
Initially growing up in the inner city of NSW, Sheppard has since moved to a different part of the country for work.
I grew up in Western Sydney, worked a lot of my life in Western Sydney. I live in Melbourne now, but yeah almost all of my life I’ve lived in Western Sydney.
Ah OK, that’s an interesting change. So why move down to Melbourne?
Well it was for this role as director of research at Empower Wealth, I couldn’t really pass up that opportunity. The guys here had been looking around for someone who could help them open up new markets and I was looking to link arms with a great investment team. So it just seemed like the opportunity of a lifetime really, that I couldn’t pass up. So I left family and friends behind and enjoying Melbourne where every day is sunny and rainy. Actually I don’t mind the weather here, so it’s OK… you get to wear jackets a lot more often than in Sydney.
Living in both Mt Druitt and Parramatta, he completed his university education at UTS.
I studied electrical engineering at the University of Technology in Sydney and before I even finished that, I was getting jobs in part-time work – and this is prior to the dot com crash. So the money was pretty good in IT and I never actually practiced as an engineer until I became a computer programmer and started doing contract work and then thought, ‘Well, where am I going to put my ill-gotten gains?’
I started investing in shares actually, until everything sort of came undone and I realised I’m not a very good share investor. I really don’t know which way share prices are heading; and that’s what got me into real estate actually, I was looking for some other investment vehicle.
Man, that’s a very interesting story and I was about to ask you, how did you jump straight into electrical engineering? It’s a very left-center kind of area that you jumped into – because I’m in engineering, it’s nowhere near computer programming.
I suppose it was electrical engineering/computer systems engineering. Towards the end of the degree I chose more of the computer systems type of subjects, but it was a part-time course. So during the time I was working, I just found it a lot easier to get jobs in computer programming and so the hardware side of things sort of faded and the software side I just excelled in and there were so many more job opportunities. It just became easier to move in that direction and once you’ve got that on your resume of course, it’s just the flow-on effect, that momentum.
In terms of jobs Sheppard undertook after university, he did a lot of contract work from a macroeconomic perspective.
There was a Department of Immigration, Commonwealth, superannuation. I did some work with the Department of Infrastructure Planning and Natural Resources, so it was all contract work; so it might be only a three-month contract or might be a three-year contract. But always, always contract work – Java programming, website programming, a bit of database, that sort of thing.
What led Sheppard to invest in the property was the experience of watching his shares plummeting, due to an incorrect prediction. Ultimately he now prefers the tangibility of property investing.
I barely knew what was going on a subject domain sort of side of things. I just had my head buried in there and back then, when I was doing all this contracting work because I was wanting to share, I was thinking, ‘This is the best place to put my money,’ and it all came undone in a bit by bit thing. And then there were the 9/11 attacks and I had a huge exposure to News Corp shares – and it’s five weeks after which it was just 24/7 news that I would have thought if any company is going to make any money out of a disaster like this, it would be a news company.
Then shares plummeted and this was the stereotypical thing from which shares, whatever was announced in the media or whatever came out, I just interpreted it somehow the wrong way. Someone knew something that I didn’t know and the shares just moved in the opposite direction to what I thought they’d logically move. And that’s what I find so attractive about real estate – you just have to think like a human being that wants to live somewhere and that’s really easy. It’s easy to think that way and instead of competing against share investors, you’re not really competing with anyone in real estate, you’re just thinking like an investor knowing that they’re the dominant force in the market and are just people who need a roof over their head at night.
From the computing side of things, he was recommended to attend an event which showed him the way to get into a property and use it as an investment vehicle.
Things went pretty ugly shares-wise, but a friend of mine said, ‘Come along to a seminar, it’s a freebie.’ This guy is talking about shares and real estate and I thought I’d like to know about the real estate stuff and I’ll just see what he’s got to say about investing in shares. And it was actually about writing covered call options over contracts of shares, which I thought was kind of interesting. But then when everything went pear-shaped, I remembered some of the content about real estate and I thought about it again and wondered whether it would be better for me to give that a go. And it was in 2002 I bought my first property and I was planning to do a reno on it and just hang onto it. And I remember asking some local real estate agents to come in and give me a market appraisal and had a bit of a fist-punching-in-the-air moment where I just thought, ‘Yes! It worked! This is it.’ And so I went crazy property everything.
The rest is now history, however, there have been some trials along the way.
It’s been a gradual process but like there’s been these penny-dropping moments where I’ve realised, ‘Oh yeah, that’s what I was looking for. That’s why this is easier this way, that’s why it makes sense.’ But I didn’t realise it at the time but I guess I had some unfortunate moments with shares and things have gone fortunately for me with real estate. Although that first property that I bought in 2002, I had tenants move in almost the next day after it settled and they didn’t pay a cent in rent and it took me almost six months to get them out! And they were so disgruntled that they lost their free accommodation that they blocked up the drains and left the taps running overnight to flood the house and there was… I think it’s something like $13,000 worth of damage.
So my point is there were some really negative moments, but when it all came together after the reno was complete it was a really good feeling to know that I was in control. It was something like you said, that I could see that’s tangible and providing accommodation for someone. So yeah, it all felt good.
Sheppard learnt from his mistakes and the worst tenants ever then went on to add more to his portfolio.
When I think back you know, those are the worst tenants I’ve ever had. I mean I’ve bought 16 properties since then and I’ve never had as much drama as that first time.
You learn from your mistakes and that’s a good thing about real estate too, that you get these opportunities to learn. I had no idea what was happening with shares. I can remember National Australia Bank – this is years ago – they recorded a record profit and I didn’t have any shares at the time, but it was on the news after trading had stopped the prior day and the next morning the share price came down. And that just made no sense at all to me, but I know that if you’ve got a house that’s close to schools and shops and parks and it’s a quiet street, people want to live there and that makes sense.
I totally agree and that’s a fascinating story. Just to clarify, with those tenants were they before you did the renovation or was that after you did the renovation that they trashed it?
The guy that was selling the property, he had a couple of properties in the area and he had these tenants who were in another one of his properties he was self-managing. I wanted vacant possession because I was going to do a runner and he said, ‘Hey look, I’ve got some tenants, you want them? They’ll move in as soon as the property settles.’ I said yes on the term I’m going to do a reno. But there was a granny flat at the back and the granny flat was quite new, the house itself was quite old. I was just going to renovate the house and that’s why I wanted vacant possession.
So I thought, ‘Alright, well we’ll stick them in the granny flat, I’ll get a little bit of income while the tradie is working and that will ease the pain of the renovation. But after a few weeks, the tradies just said, ‘We’re not doing any more work until you get rid of those tenants, they’re stealing our equipment.’ They did knock it off and they just refused to do any more work. Then it was approached by the Tenancy Tribunal and more or less inherited nightmare tenants. That was the first lesson to be learned, that you’re not just buying the property if there’s a tenant in it. You’ve got to research their history, their rental history as well. So big, the big lesson learned there.
There have been many other mistakes he has made throughout his journey, however, he ensures he never makes one mistake more than six times.
I’ve made a lot of mistakes in real estate. I think the other great thing about the real state is if you’ve got the right attitude, you can learn from them. And so the first mistake I made was not researching the tenant. I’ve made other mistakes like trying to renovate a property myself.
The second property that I bought was only a stone’s throw from the first one and I thought I’d pictured it like I would invite some friends over and they might help with the reno, and I’ll put on a barbecue and it’d be like a Coke commercial. It was nothing like that. Nobody turned up and I was there at like 9 o’clock at night in the dark, just standing and standing and it was terribly draining. And I realised tradies, what they’re doing they’re working on this full time, they do it 9:00 to 5:00. They’ve got all the equipment, they do a better job than me, they’ll do it quicker than me and it’s a lot like working a second job when you do it yourself kind of reno.
I decided after that second round that that’s the last time I’m ever going to do a reno myself. I said the same thing after the third one, the fourth one it was solved. So I pride myself on never making the same mistake more than about half a dozen times.
By far his worst mistake was taking his eye off the ball when investing in particular markets.
But probably I would say my worst mistake is taking my eye off the property market that I’ve invested in. I might have picked a really good location for that period of time and I’ve picked some regional markets – this doesn’t really happen so much in city markets. But you can easily pick a regional market which is booming and have some fantastic capital growth, but quite often, it’ll come back a long way. And I’ve bought in regional markets in Queensland and even in New Zealand where they’ve had some spectacular capital growth, I’ve picked the right timing of the market. And then it was drummed into me when I was reading the books, going to the seminars, learning all I could about property investing, that you buy and never sell. And I believe that’s a mistake that you should always be prepared to sell if the circumstance presents itself. I had bought into markets, I waited until I got some good capital and I borrowed against that equity and bought elsewhere. So my eyes are on the next market, the next boom location and I’m sort of doing this leapfrog to just create more and more equity.
But when you take your eye off those markets and they do correct, you could end up with negative equity; and that’s exactly what happened when the GFC hit. I had properties that I owned in the name of the trust, I was a contractor and I was sourcing finance from non-bank lenders and everyone got scared about providing credit. So the non-bank lenders that I had, their interest rates actually went up when all the banks here in Australia were dropping rates too because we were in an economic crisis. One of my loans went up to about almost 12%, 11.85%, no money and so obviously, you want to refinance but everyone’s lending policies have become just so much tighter. And I’ve got properties that are interested only in the name of a trust and I’m a contractor, so nobody wanted to touch me. Yet my interest rates are going up and yet prices have come back.
Sheppard then had no choice but to sell.
I had no option but to sell down a significant portion of the portfolio and that’s when I realised where a price that appears, though they’ve come back and I’ve had to sell for a loss. So here probably, the worst mistake I have made is taking that advice of buy and never sell and then taking my eyes off the market. Now some people could argue the case that if I’d just bought in cities that that wouldn’t have been a problem. But I mean Perth is the fourth biggest significant urban area in Australia and yet if you had bought in Perth around 2004, then flash to 2015 you have had probably some negative equity because of the downturn in their resources.
So you can still lose money, there are still markets that have become oversupplied. There are still corrections that can occur. I think every investor just needs to keep an eye on the property market they’re exposed to and be prepared to let go – and that’s probably my biggest mistake, locking in a tremendous amount of negative equity over time.
However, despite the tribulations he has experienced throughout his journey, he has also had some highs where everything seemed to click into place for him, such as how to create the ‘wow’ factor via renovating.
I’ve had a few a-ha moments. One of them early on, when I was into renovating, it was just that you’re trying to target a property where everywhere you look there’s something that’s not quite right. And it just looks ugly, it looks old, it looks worn down and the sum of all those things makes it look like a terrible property.
But if you technically look at each one individually and add up the cost and then try and picture the property where everywhere you look it says some ‘wow’ factor. It’s an effective synergy works that for you when you’re trying to find a renovator and it works for you when you’re flipping or selling or revaluing, in that everywhere you look there’s a ‘wow’ factor. And their actual technical cost of each, there’s a discrepancy there. So that was like an a-ha moment when I was renovating, I’m looking for something that just needs to make me feel like this property is a dog box.
But honestly, if you look at it from a numerical perspective, how much it would cost to renovate? It’s not that bad. And then of course after you’ve renovated, you’ve got some, everything’s shiny and new, someone walks in and they go, ‘Wow, this is really nice,’ and then they’ve got the bias where they’re feeling like this property is actually worth more than what it really is.
But the most breakthrough moment came when Sheppard realised he needed to find a market where the demand exceeds the supply, inspiring his game-changing algorithm.
What I’m into now is more a capital growth thing. You know when you start off as an investor, you’re trying to force the issue. You’re not experienced at picking growth markets, you don’t know what to look for and so a renovation is an excellent way to sort of force the issue along because things are in your control and you can. It’s like working a second job; it’s not worth your time, but the second a-ha moment was doing my research, trying to find these growth locations. I realised what I’m after is a market where demand exceeds supply.
And it was, ‘How can I identify easily a market where demand exceeds supply and you’ve got things like high auction clearance rates?’ Obviously, when auctions are going great, there’s always a sale, then that’s a case of demand exceeding supply. If properties are snapped up really quickly, that means demands exceeding supply. If vacancy rates are low, that means demand is OK. And so I started looking in the back of these magazines all this data that they’d have on every subject and I didn’t have a fear of investing interstate, didn’t bother me at all.
I just wanted the right kind of market and I thought, ‘If this is all the data, I knew how would I interpret this metric, this indicated statistic from a supply vs. demand perspective and pick out the best market in the country to invest in.’ And that’s when I put my programming skills to work and wrote this algorithm to acquire all this data, piece it all together and come up with this demand to supply ratio and that would identify markets that have the most potential for capital growth. I guess it was just that a-ha moment was all about supply and demand. Everything – jobs, population – they all affect those two things, supply, and demand. If you can interpret a market based on supply and demand, then you know where the future growth is going to be.
With hundreds of data sources available, merging his knowledge of property and computer programming has allowed him to overcome challenges along the way.
There’s a lot of challenges with it. I mean there’s been some data sources that I’ve acquired and then had a close look and realised, ‘Well this really isn’t telling the story that I thought it would.’ So sometimes we can be misled that way. I guess it’s a case of picturing people in a market and what they’re after, what they really want, and then how that would affect a particular metric, a particular piece of data that someone’s recording somewhere.
It might be just turning up to open inspections and noticing that there’s a lot of couples here, or it might be actual auction clearance rates reported by some data source or some demographics from the US. But I think it comes down to trying to interpret as accurately as possible what each metric is telling you.
I could do it this afternoon, pick a property, buy and allocate some funds to it and then just sit on my hands; and the next three years, four years I’ve got enough equity to go again, assuming I can service the mortgage.
Finding Great Capital Growth: Market Data Analysis With Jeremy Sheppard
Initially what held Sheppard back from investing into property was not having the essentials – a deposit, confidence and adequate knowledge to make big decisions.
A deposit, you know it’s a lot easier to get into initial shares with a few thousand dollars; you can’t do that with real estate, but I had been putting money aside when I’d been trying to push it towards a share portfolio. So I had something there even though the market had crashed and I had less than what I started with. There was still enough there to get into real estate and of course, the first property I bought was $206,000 back in 2002 it seems. So it’s my view, that’s a good 50 km west of Sydney where I first bought it, but I think being sure of what you’re doing is something that’s always going to hold you back.
And when I think back, comparing what I know now to what I knew back then, I do feel like I was a young cowboy, you know just trailblazing. I really didn’t know what I was doing and I can vaguely remember thinking it’ll sort itself out, or I’ll learn from this if it doesn’t work out, or what could possibly go wrong? But fear is one of the big holdbacks and then just that deposit.
And the resources – I thought the resources that were available for information and data back then, I didn’t think that was really a limiting factor. It was more just I’ve got to make a decision on the information I have available and I’m scared too – and I’m restricted in – what I can buy based on the deposit that I’ve got.
There were some resources that he regularly turned to that aided him in gaining more confidence to start investing in property. Unsurprisingly, as a person with a background in computers, he was drawn to data.
I was always fascinated by the data in the back of Time magazine. So there were two magazines back then, Australian Property Investor magazine and Your Investment Property magazine. And they had a big data section at the back and I just used to pore over those lines of data and just think, ‘If this is the only information that I knew, how would I pick which one of these markets is going to be better performing one?’ And there’s nothing better than going and visiting a location of course, but there’s a lot of information you absorb when you go and visit a location but that is subconsciously absorbed. I think most people refer to that as getting a feel for it, getting a feel for the location – and sometimes that can bias us. There have been a lot of markets in the past that have been lower socio-economic demographic markets that have had some spectacular capital growth, yet they’ve got some stigma associated with them.
And I mean some of the markets in Sydney! I mean I remember Redfern years ago had a terrible stigma. But it’s just so close to the CBD, it’s such a convenient location, that was never going to last. It was always going to be an opportunity; one that I missed actually. But yes, stigma and getting a feel for a market and having that property data at the back of magazines. I think I read an enormous number of books on property investing, to the point where I started feeling most confident with my investing is when I started hearing the same things from different sources. See if you read a dozen property investment books, you start hearing the same things and then you know that you’ve probably got things. It will be contradictory, every expert has different opinions about how to go about things different strategies.
And I can remember reading one book and thinking, ‘Wow, why did this author think they knew enough to write a book? I disagree with this and I disagree with that’ and then I thought, ‘OK, I’ve got to stop reading books and start getting out there and investing.’ I think a lot of people are held back by fear and good things sometimes, you know to try and get business turnover. You might hear some contributors say, ‘You’ve got to jump in. You shouldn’t get that analysis paralysis.’ But I think fear is a good thing, it means that you haven’t learnt what you need to learn. If you knew enough you wouldn’t have that fear. I just kept pushing, kept reading, kept absorbing until I felt confident. Of course, there are some people who are just always confident about everything they do and I should probably go back and speak to someone else who will play the devil’s advocate for them. But for me, me being a cautious kind of guy, I knew that I had to wait until I felt confident.
He names a few resources by authors like Robert Kiyosaki, Michael Yardney and Margaret Lomas among those that helped him in his journey.
I think Rich Dad Poor Dad, for the concept of what is an asset and what is a liability; not so much for property investing specifically, but just you shouldn’t be borrowing money to buy liability and you should be acquiring assets. What is an asset? It’s not something that can be sold for cash, you can sell your car for cash, but your car is a liability. It generates expenses and it depreciates in value on something that generates income and appreciates in value. So that just stands out for me for just a basic concept. Actual property investing strategies, it’s funny because I’ve been to seminars from spruikers and I know why people call them spruikers because this is very hard to replicate these sorts of things. But I’ve learnt stuff, you can learn from just about anyone but you’ve just got to be careful.
I don’t want to pump up any spruikers, but my point is that I think it’s better to get an enormous number of opinions from a wide range of experts rather than just focus on one or two. I’ve read books from let’s see China I think is like a standout author. I think there was a book that Michael Yardley wrote which I thought had a good broad perspective on most things, one of Margaret Lomax’s most recent books I thought was quite good. I can’t remember the title I’m sorry, it was like 20 Questions You Should Ask to Invest in Property or something. That’s one of the more recent ones. It was sort of towards the luck she’s written, something like 18 million you hear her talk to her. I think the first one I read I wasn’t at all impressed with that. But then one of her more recent books I thought, ‘Oh yeah, that’s not going to go wrong,’ I mean anything like that.
With more than a dozen properties Sheppard has formulated an expert, data-driven strategy that he works off, including an elimination process to help him determine the top markets that suit his budget.
I probably mentioned renovations a bit too much, that’s not a strategy for me anymore. It really is capital growth, that to me is the bee’s knees of property investing. It’s so easy if you get it right. Like all you have to do is get your research right and there’s no backbreaking labour, it’s development. For example, we’ll have some high-risk projects blow out and renovations are just the dumb down, cut down version of development – they have the same sort of risks and higher expense and things can go wrong. But the research you can do… when I think right now if I had to buy an investment property, what sort of research would I do and how much of my time would it take? I think I could do it this afternoon, pick a property, buy and allocate some funds to it and then just sit on my hands; and the next three years, four years I’ve got enough equity to go again, assuming I can service the mortgage. Still, serviceability is always going to be a limiting factor.
But my approach would be I’m looking first of all for a bunch of markets that have high demand, low supply. I’m looking at statistics because I can gather those, I can run a query against the database and within seconds I’m looking at the top markets that suit my budget. From there, there’s some data that I can’t acquire automatically and so I would go to the Council website, I’d be looking for developing applications that are going to spoil supply in that market. There’s a large number of development applications that mean new properties are being built out, adding to the supply, then I’d probably scratch that one from all. Then I look at another market and I think it’s a bit far from the CBD, there’s a bit too much vacant land even though there aren’t any development applications lodged. There’s potential for the developer to go in there, clear the land, divvy up the blocks and create oversupply. So I’ll scratch that one, then I might look at another one on the unit market; it’s a bit too easy for the house crossroad to be knocked down, the one down the street and unit blocks to go up, so I’ll scratch that off the list. And I’ll just keep going like this, I’ve got my shortlist which the database gives me and then I do fundamental research on each one of those to scratch various markets off the list. Then what I’m left with is something that is… well, first of all, that shortlist has weeded out 99% of property markets. If it’s like a list of even 30 properties, it’s actually down to 99.9% of being weeded out. So I know that already I’m in a good position now – and then I’ll scratch markets off that list as I go, whatever I’m left with I’m already very confident is going to be a good market.
He says it is also important to consider the obvious drawbacks of a potential investment, such as high traffic or economic issues.
From then on, it was just a case of don’t make the mistake of buying in a silly street, like one that’s got maybe high traffic or economic issues, housing commission. And even then you could buy in an area that has heavy housing commission, but if that housing commission has already been there for like 10, 15, 20 years, that’s already been factored into the price of properties around that area. So it’s not so much what’s there right now, but how long it’s been there. So people will always talk about buying close to parks and schools and shops and transport, but those locations don’t outgrow other locations in the same suburb if all of those amenities have been there for a long time.
So for example, let’s say a suburb gets a new train station – I get that is a significant boost. If you’re within walking distance of that train station there’s going to be a period of accelerated growth that that property will experience, but eventually, the benefit of being within walking distance of that train station gets factored into the price of that property. And then it’s business as usual, the capital growth is just normal from then on. So it’s not so much what it’s near, but how long those amenities have been there. Have they already been factored into the price of the property? So if it’s trying to date things rather than what things are there anyway.
So that’s the second thing that I would do after looking for pending supply; Council website, I’d go and pick streets that I think at least aren’t stupid like having high traffic or like I said housing commission. But with the housing commission, if I really like a property there and I know it’s close to housing commission and I know that housing commission might actually be selling rather than buying more properties in that area, then I’m OK with it.
He elaborates on what a property market looks like.
I’ll tell you a couple of different ways. I mean, first of all, everyone knows what a suburb is, but then there could be houses in a suburb or units who’s got the housing market on the suburb or the unit market in the same suburb. You can also refer to a market as being the local government area, or Sydney is a property market, Melbourne is a property market. So it’s like an aggregation of a large number of suburbs, or it’s a specific type of property within a suburb. But that’s what I would call a property market.
The next steps Sheppard would take to invest in a property with potential capital growth entail communicating with real estate agents to determine why the demand may be exceeding the supply in the market he is targeting.
If I found some subscribers that are of interest to me and IBM’s research, the Council website, I don’t believe there’s going to be a pending supply that would ruin things. The next step would be to speak to some of the real estate agents and ask them if they have any idea of why demand is exceeding supply in this market. And really what I want them to say is nothing. There’s no specific project. I think that the best markets to invest in are the ones that sort of creep up on us. A lot of people are chasing after markets that are influenced by a new infrastructure project and that might influence capital growth, that might influence it in a negative way. For example, a new shopping centre: a new shopping centre across the road sounds great, but it could be just so noisy and congested that properties nearby are actually depreciating in value. You could get too much pedestrian traffic and it just doesn’t feel private anymore and it can actually be a negative when you thought this $100 million project was going to boost value.
It’s hard sometimes to gauge exactly how much influence from new infrastructure will benefit. Some have more likelihood of a positive benefit than others. For me, if the real estate agents are saying, ‘Well I dunno, there’s just heaps of people turning up to auctions. I’ve got 20 couples contacting me to look at this open inspection,’ that confirms to me that the data that I was getting about supply and demand is correct. And if they say they don’t have any knowledge of anything that’s taking place, then what’s probably happened is gradually over a period of time supply has been soaked up. Developers have been unable to build in the area, maybe because of zoning restrictions, maybe because the council just isn’t amenable to development. The council could have easily just decided, ‘Well this is it, this is good, we’re happy with things the way they are so we’re not going to let you develop anymore. We don’t want anymore increased density; we can’t accommodate it, we don’t have the infrastructure.’ So if the area is still desirable, gradually all that supply gets soaked up and you get to a chronic undersupply point. And it’s not because of any infrastructure project, it’s just snuck upon us and that means nobody else knows about it.
An example of this is the evidence of a new airport being built in Toowoomba – splashed across the media and within earshot of developers, the market in that area didn’t take off.
I remember about half a dozen years ago from now, Toowoomba had a new airport being built and I think a bypass and there were lots of big projects that were believed to stimulate that area. These infrastructure projects, the problem is every developer and his cousin knew about it and so they started cashing in on it. They thought it was going to build a lot of townhouses and try and force them off, because of all these infrastructure projects and prices just didn’t burn. They just didn’t take off because the demand was met with supply. But if you’ve got a market that developers don’t know about, it’s not on their radar, it’s not in the news, the media isn’t covering it, it’s just a simple case of supply getting soaked up. Then that sort of market is going to last a lot longer – than balance where demand exceeds supply is going to last a lot longer because it takes a lot of price growth.
A lot of people turning up to open inspections before a developer recognises, ‘Hey, this is an opportunity,’ and then they try and get in there and spoil things. So if I hear nothing from a real estate agent about what’s going on other than a lot of people turning up to open inspections, then I know that’s more than likely a safe market. And I don’t go into too much detail about the nature of the property on a street scene. I think that the vast majority of the capital growth I’m going to get is from the market in general, so I’m not fussed about having the best property on the best street; I just want to be somehow involved in the best suburb and it will do the majority of the heavy lifting.
So what is his analysis on a growth corridor that is shared publicly?
A growth corridor is probably something I would want to avoid as an investor. It’s interesting, this thing with population growth, I actually don’t consider population growth statistics at the suburbs level anyway to be of tremendous help. If fact, if you could identify to me the suburb with the highest population growth that would probably be top of my list to avoid because the market can deliver the best capital growth, or more likely the markets where you can not have any population growth vacancies at zero, Council will not allow any new development. So how can the population in that area actually grow? From the growth corridors where developers have leveled the land and created new blocks and new buildings and then people move into them.
Then the data is recorded and you see massive spikes in population, but that’s supply based, so the population grew because of additional supply. Supply is the enemy of capital growth. I mean people have got to live somewhere, but as a property investor developers are our enemy; supply is the enemy. So our growth corridor, what is a population growth corridor? And when they say this area is going to have a population growth, there’s going to be another 30,000 people through this area over the next 10 years, that sounds all really impressive but the way in which they do those estimates is they figure out how much land can be subdivided, how many dwellings can be added. It’s all about how much can we apply to this market, to this geographical area and then assuming people feel that we get our population growth estimate of 30,000 people.
So it’s actually when they’re recorded like that when they’re published like that, it’s an indicator of supply not an indicator of demand. A lot of people picture, ‘Oh, there’s 30,000 people lining up at the gates waiting for them to be opened and they are going to tear in and I want to have a property to offer them.’ But it’s not like that, it’s a supply indicator, not a demand indicator. So I would generally try to avoid population growth corridors because that’s just where supply is going to be added. We’re looking for markets where there cannot be any population growth.
With such a sophisticated strategy, Location Score takes the challenge out of hunting for a property by finding the right property for you through an unbiased score from 0 to 100.
I think the beauty of having a database of all these metrics for different suburbs around the country allows you to filter through every suburb within seconds. Really the database just does all this number crunching for you and there’s a lot of people who will look at data like I mentioned population growth is a big one and everyone seems to think that population growth for this subset that’s really important for that; so they want the highest population growth. I interpret it as being a potential problem. First of all, their interpretation of the data – if you want an expert, someone who has experience with property investing, to interpret all the data that is out there like you say there’s a huge amount of it.
Secondly, you want that data in a consistent manner for every suburb country-wide so you can pick out the best from the worst. And this is the beauty of having a database like Location Score – you can quickly filter out 99% of those markets that just don’t cover from a numerical perspective. And the algorithm operates the same whether it’s in Sydney, or in Perth, or in Adelaide; it’s consistent and there’s no bias. So you’re not getting an opinion of a truck driver or a mortgage broker or an accountant, you’re just getting a completely unemotional algorithm saying, ‘Here is the score, the metrics, how they stack up for this suburb’ and you compare it with another suburb and that just gives you a great starting point for the next phase of your research.
The more manual sort of searches like I mentioned, contacting real estate agents and looking at the Council website and Location Score is a score from 0 to 100 for each property market around the country. So we look at things like auction clearance rates, vacancy rates, the percentage of stock on the market. We look at every demand and supply metric, or the key ones, and we roll it up into a single, easy to understand score out of 100. The higher the score, the more demand exceeds supply and so the more likelihood that you’re going to get capital growth and so we use Location Score in this respect. We will use it as a shortlisting tool, to filter through literally thousands of property markets within seconds and the ones on top of the list, we can then do our more fundamental research on.
Location Score was mostly directed towards DIY investors who wanted to avoid investing in dangerous markets.
I have friends who know I’m in real estate, they know my property investment research and I’m amazed, they’ll go out and try and make an impulse buy without consulting me and they’ll purchase a property that I probably wouldn’t touch. And I think this is how most investors get stuck – they see a glossy brochure from a property developer and they think, ‘Well it seems like a nice idea,’ and then they go and make this impulsive decision and they’re stuck with it. Five years later, it’s gone nowhere. So Location Score is designed to be very easy, just log in and within literally a couple of minutes you can see whether you’ve just flagged the danger zone you want to avoid, or whether it’s least OK.
And then you start asking where are the best markets and that’s when you can use Location Score’s top 50 – in whatever state or capital city, you have got an interesting obviously there’s a lot more research to it. But what we’re giving investors for a very affordable price is a very quick research tool that allows them to really hit the ground running with something half decent.
If Sheppard were to meet himself from ten years ago, what advice would he give?
Ten years ago I hadn’t done any sort of data research, so I might have said something like, ‘Focus on supply and demand and big data. Big data is going to change the world – focus on big data and supply and demand.’
For the next five years, he is excited about the new release of the products he has been working on.
The thing I’m most excited about is the products that will release even later this year or early next year. I think they’re going to be game-changers along the same lines of Location Score, but just 10 fold bigger. For me, I get a big buzz out of providing a tool that other people can use and that changes their financial future. That to me is the most exciting thing I’m looking forward to the next couple of years.