A good investor has a good set of tools.
A lot of investors – even investors who have been in the game a long time –don’t realise that there are a lot of tools out there now that help you crunch the numbers and take the guess work out of investing.
Obviously I can’t go into all the tools in detail in this blog – they all have manuals of their own. But I’ll give you a quick overview here of what I think should be in every investor’s tool-kit.
1. Grid Variance Analysis
Grid Variance Analysis (GVA) is a tool I’ve developed myself (patent pending!) and brings together everything I’ve learnt over the years about analysing market data.
GVA is a tool to help you identify which suburbs are prime investment targets – where you’ll be able to manufacture growth. It works in any property market – from New York to London to Caboolture.
And the great thing about it is that it helps you cut through the emotion. You’re not investing in areas because they’re “pretty” or “have lovely cafes” or whatever. You’re basing your decision on actual data.
At any rate, this is the first tool I tell my students to get a hold of. Download the tool and start getting data-driven with your investment decisions.
2. Feasibility Studies
Once you have used GVA to discover prime investment areas, a feasibility study (or what we affectionately call ‘a feaso’) will help you identify which strategy to deploy, and which exact property to invest in.
Very basically, a feasibility study crunches all the numbers in a deal and tells you if it’s going to make you money. If it’s not, then it’s just not a feasible investment.
However, it can take investors some time to learn what data they need exactly to plug into a complete feasibility study. It’s not just a matter of purchase price and sales price. You’ve got to look at your holding costs, your rates, renovation and maintenance costs etc.
Again, this isn’t somewhere you want to be using guesswork. You need to get specific.
I’ve developed a software package for my students that will run a complete feasibility study for you. It also allows you to do “reverse feasos” where you can look at a recent sale, and work backwards to determine what purchase costs or interest rates needed to be to make the deal work.
There are different packages available, but I can definitely stand by the one we’ve developed. I know that it works, and many professional, full-time investors are using it.
3. Get dirty in the data
Since these tools make it so easy to crunch the deals on a market or a deal, I recommend that my students just go out and do dozens of them. Take a look at a bunch of properties for sale and crunch the numbers to see what you would need to make that deal fly. Or find existing sales or developments, and do a reverse feaso to figure out what the developer or investor needed to have paid to turn a profit.
The trial a few different strategies on the same property, to see which strategies have legs and which ones don’t.
Then do it all again, 20 times each!
I’m serious.
It’s just a matter of punching in the numbers. It’s not hard.
But once you’ve done a hundred or so feasibility studies across a range of markets, you start to get a very good idea of how the different variable – the purchase price, the LVR, the mortgage costs, the development costs etc. start to influence the final result.
This is the fastest way I know to develop the experience and ‘intuition’ of a seasoned property investor.
4. Return on Equity Analysis and Opportunity Cost Analysis
One of the things you will understand as you develop a property portfolio is that it is no longer enough to find a ‘profitable’ deal. You want to find the ‘most profitable’ deal.
You also want to be able to look at properties in your existing portfolio and see if there might be better things you could be doing with that money.
Return on Equity Analysis and Opportunity Cost Analysis are tools that help you do that. They help you balance the figures against each other, and help you effectively compare apples and oranges.
So, they help you answer a complex question like, should you hold on to this little cash-cow you have with a solid bank of equity, or should you sell it and put the money into a joint-venture duplex development with an 18-month project timeline?
That’s a complex question. There’s a lot of moving parts there, and the ROE Analysis tool and the Opportunity Cost Analysis tool that I provide my students with helps you do it in a matter of minutes.
Again, you should be using these tools and crunching numbers on potential deals just for fun. You should run through different scenarios, and start to get a feel for how all the pieces fit together, and where the best place for you money actually is.
5. Sensitivity Analysis
While every deal is different, every investor is different too.
Every investor is going to have a different approach to investing, and a different appetite for risk.
For example, if you’re a young single at the start of your working career, you’re going to have a much higher risk tolerance than an older couple at the edge of retirement, determined to protect their nest-egg.
Sensitivity Analysis helps you get a better feel for the risks involved, and gives you another way to compare deals.
For example, you might actually prefer a deal that delivers a projected $90,000 profit, with a worst-case scenario of a $60,000 profit, to a deal that delivers a projected $150,000 profit, with a worst case scenario of -$20,000.
The Right Tools for the Job
Obviously we’re just scratching the surface here. But these are the tools I work with and the techniques that I teach all my students.
DB.