Property Sourcing Profits – Part 2: The right areaBy John Stokoe
STEP One – THE RIGHT AREA
Where should I start my sourcing business?
So last month we introduced the concept of Sourcing property as a business/income stream. This month we start by understating some easy steps on how to find an area you want to operate in. Selecting the right area is key, so identifying a good area, with a strong rental or buyer demand is the cornerstone of any successful sourcing business. Thinking about how to find the perfect sourcing area may seem overwhelming at first, but there are a number of tried and tested tactics you can employ that make the process ever so simple, and the reality is you can source property from just about anywhere, as long as you understand the local demand! For example, I know of a successful individual who lives the sunshine lifestyle in Marbella and doesn’t set foot in his area in the UK.
First, you need to understand the levels of available ‘stock’ in a given location—the number of available properties on the market. You also need to understand which specific types of property are available in good volume, which are in demand, and what the approximate sale prices of those properties are. Having a good understanding of local market dynamics stands you in good stead for identifying a niche sourcing strategy.
A great place to start analysing the local area is an online property portal such as Rightmove (www.rightmove.co.uk). Your first step is to create a table that will help you categorise the available properties in an area by type, number of beds and asking price (see step-by-step guide below. Note: In the example below, we are using a UK specific online tool but these tools area available in every major market globally for you to use.)
Qualify Stock Levels
- On the Rightmove home screen, type in a medium-size town or area (e.g. Newport) and click on the ‘For Sale’ button to the right.
- On the next page, you can narrow your search by type of property, number of beds etc., but for now, leave these as they are and select ‘Find Properties’.
- Now, at the top right click on the ‘Filters’ drop down. Select New Home, Shared Ownership and Retirement Home in the ‘don’t show’ section.
- Move along to the “Property Type” drop down. Here you can individually select detached, semi-detached, terraced, flats and bungalows.
- Using these filters, you are able to see how many of each property type are currently available in your chosen area. Now you need to record this information in a way that’s easy to digest. We’d suggest creating a simple table, categorising properties by type, number of beds and asking price. This will give you a clear picture of what stock is currently in your market.
Once you’ve determined that there is plenty of stock on the market, you need to qualify that there is a demand for these properties. Broadly speaking, there are two types of demand; demand for purchase (people looking to buy their home) and demand for rental (people looking to rent a property). You will need to qualify both in your area, to ensure that your investor has two possible exit strategies (very important) for the deals you source. First, let’s look at purchase demand.
Jump back on Rightmove and, using the table you already created, add another column that will be ‘Sold subject to contract (STC) / Under offer’. These are the properties in the area that are – as they say – currently under offer. The agents have marked these on Rightmove to show they are no longer for sale, but usually, these will stay on Rightmove until the property has actually sold and they are a good indicator of sale volumes. Comparing the number of properties that are for sale, to those that are sold STC, will help you understand whether houses in your area are selling at a good speed.
Qualify Purchase Demand
- Pick up where you left off. After completing the steps above to qualify stock levels, click on the ‘filters’ drop down on Rightmove.
- Select ‘Include Under Offer, Sold STC’ box. Click done.
- You should see the number of ‘results’ rise. This now includes the properties which are both up for sale and currently Sold STC.
So now you’ve qualified that your area has a good level of demand and properties for sale. You should also have a good understanding of the types of properties that people tend to be looking for. This is great information you can provide to your investors to show that you are providing them a deal that caters to the local demand.
The next step is to assess rental demand and this too can be done using Rightmove. Create a second spreadsheet to record the number of properties available to rent, categorised by type of property, number of beds and cost to rent. Then, populate the table using the steps below.
Qualify Rental Demand
- On the Rightmove home screen, type in the area you are searching and click ‘For Rent’
- In the filters section, under “property type” individually select detached, semi-detached, terraced, flats and bungalows and record the number available to rent
- Next, create a spreadsheet that categorises the rental properties by type, number of beds and rental price (see example below).
The final step is to call up a several estates and letting agents in the area and ask three questions:
- If I were to bring you a property that would either let or sell in less than two weeks, what would it look like and where would it be?
- For that specific property type, what could I hope to let it for?
- How much would you expect a property like this to be worth once fully refurbished?
Obtaining the answers to these three questions helps to verify the findings of your desktop research, consolidate your understanding of the local area and estimate approximate rental yields—seasoned investors will typically look for those in excess of 8%.
Finally, another neat trick to qualify demand, is to place a dummy advertisement on a website like Gumtree or Spareroom. For example, if we have a four-bed house to let we might create dummy advertisements for a four-bed HMO and a four-bed family let to see which attracts the most interest. This is another great way of assessing demand and advising your investors on creative strategies that will help them achieve a higher return on investment!
After completing all of the above, you should have a very good idea of a particular property type that is in high demand, will command a strong rental yield, and for which there is sufficient stock to acquire and source. If you can tick all of those boxes, you’ll have identified a sound sourcing patch on which to build your business.
STEP TWO – FIND YOUR DEAL
How do I find investor-grade opportunities?
About the author
John Stokoe was born and bred in South Africa but his urge to expand and grow led him to the UK. Banking technology was hot during millennium and John worked himself into blue-chip Investment Banks where he steadily progressed into the Head Of Service Management and Business Continuity for major Japanese Banks. Detailed profile: Authors Profile