Finding a high-performing investment property isn’t easy in today’s market. Properties that perform—by providing high yield, high growth, and sometimes positive weekly cashflow—are rare… but they ARE out there. The ability to locate and secure high-quality properties separates successful investors from the rest.
When assessing potential investment stock, two important questions arise:
How do you separate ‘unicorn’ properties from the countless (and often low quality) stock options being pumped out by developers and property marketers?
How do you analyse existing homes, townhouses, units, and other property classes to determine their expected growth and return?
For years, investors have called upon a spectrum of tried and tested qualitative and quantitative data points to analyse the potential upside (and downside) of an investment property. These metrics include, but aren’t limited to:
- Rental Yield
- Historical Growth (incl. “Property Clock” data)
- Vacancy Rates
- Average Property Value
- Age of the property
- Type of property (ie. townhouse, unit)
- Land component value
- Planned and existing infrastructure, ie. transport
- Planned and existing services ie. schools, hospitals
- Cost of finance
The focus of this article is to introduce and unpack two additional property analysis metrics: “Inventory levels” and “Months’ Supply”.
What are Inventory Levels?
Put simply, an inventory level indicates how many properties are still actively listed on the market within a monthly period.
A common way to calculate inventory levels is to record the number of active listings and pending sales on the last day of a calendar month.
Another way to produce a more accurate representation is to calculate a daily average across the whole month, but this requires more data processing.
This metric becomes powerful when viewed across a twelve-month period or longer.
How are Inventory Levels useful?
An increasing inventory level indicates more stock is coming onto the market, which means there is less pressure for property prices to increase. Increasing inventory trends generally means prices will remain stagnant… or run the risk of a decrease.
A decreasing inventory level indicates less new stock is arriving on the market… which means that, if demand is consistent, property prices may increase in that area. Bingo – this is what property investors are looking for.
What is Months’ Supply?
The second metric is month’s supply – which indicates how long it would take an inventory of homes to sell, given the current sales pace.
Months’ supply is calculated by dividing the current inventory of homes for that month, by the sales pace from that month:
Inventory Level ÷ Number Of Homes Sold Per Month
How is the ‘Months’ Supply’ metric useful?
Months’ supply provides an insight into supply and demand and can be used to better predict price increases or decreases. If demand is consistent in an area with a low months’ supply, property prices may increase (as demand exceeds supply)… which is exactly what property investors are looking for. Very low months’ supply—from 1-3—indicates very strong market demand.
More than 8+ months’ supply indicates a glut of properties on the market and could initiate a drop in prices (as vendors adjust to sell their stock).
Like all of the other metrics listed at the top of this article, inventory levels and months’ supply are not crystal balls. They’re not a silver bullet. No metric is. Predictive analysis is not an accurate representation of exactly what will happen in the future.
However, analysis of trends, comparing datasets, and creating a qualitative and quantitative assessment of a particular property gives smart investors an edge over others. Inventory levels and month’s supply contribute neatly to this process.
Helping You Finance Investment Properties
The team at Trilogy specialise in helping investors get a better loan with a lower rate, more favourable terms and conditions, and the right structure for maximum return on investment.
The quickest and easiest way to learn more is to request a Free 30-Minute Finance Strategy Session during which you will…
- Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans for cashflow positive investors
- Gain greater clarity over where you want to be in terms of owning investment properties (and how to structure your loans to get their the fastest, safest way)
- Discover how to unlock the equity in your current properties, so you can build your portfolio – and your wealth – faster (and enjoy a better lifestyle now and in retirement)
- Discover clever, no-cost ways to save money on interest, fees, and charges — immediately
- Learn about our process to find you a better loan that will save you thousands.
This no-obligation free session will be held with one of our experienced mortgage brokers who specialise in structuring cashflow positive property investments.
Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.
Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.
Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)