What is The Practicality Test?
Hi, Ben Kingsley here. In this Expert How to Video, I want to talk to you about or introduce another concept which flows on from The Buyers Decision Quadrant. Now you can check out the Buyers Decision Quadrant video in this area of the expert session under our How to Videos but I want to basically bring that further. I want to talk about the Practicality Test today so let’s start. Basically, we know the concept of Demand and Supply. We understand that Demand is led by Supply and sometimes we can overshoot on supply and that obviously impact prices. But I also want to get into the psychology. The psychology of the decision making around where we buy so leading on from the Buyers Decision Quadrant, I call this The Practicality Test. What I’m focusing in on is I’m looking at my audiences. Now we also know that 70%, and I repeat this, 70% of
Basically, we know the concept of Demand and Supply. We understand that demand is led by supply and sometimes we can overshoot on supply and that obviously impact prices. But I also want to get into the psychology. The psychology of the decision making around where we buy so leading on from the Buyers Decision Quadrant, I call this The Practicality Test. What I’m focusing in on is I’m looking at my audiences. Now we also know that 70%, and I repeat this, 70% of properties in Australia is owned by owner occupiers. So they are price makers and property investors should be price takers. If we put our owner occupier buyers hat on and we start thinking from a practical standpoint what are the considerations in which owner occupiers are making their decisions, we can then start to understand the concept of practicality test.
I want to give you an example. Let’s say we’ve got a couple with two children, an 8-year old and maybe a 12-year old. Now, they are going through the decision of where do they want to live and what type of dwelling, what type of home is going to accommodate their need. Now the reality is if we look at say a one bedroom unit, well that’s not going to be able to accommodate the bed space that they need so it fails naturally, the practicality test so that is easy to understand. But let’s make it a little bit more challenging around the location. Let’s say there is a two bedroom apartment or even better, a three bedroom apartment and here I am, in an inner city location. So I’m thinking perfect! Bedrooms for us and an ensuite and then two extra bedrooms and a bathroom in this apartment. And so, initially, it is starting to say, “Well ok, it passes the initial test.” But what about when it get into us living? Now, where is the schooling? How are we going to get from they city location where we’ve got congestion and traffic to be able to get out to the school zone? Now we might be able to do that because we want our kids to be at the higher schools that are located in the city but then it comes down to, what about the sporting activities that we want to plan for? We’ve got two cars and we want to basically move around. We need those two cars because naturally, I need to take little Johnny to his basketball game and my wife needs to take Sarah to her netball game and they move around, it’s not always in the same location. So would we be able to do that through public transport? Well, not through a lot of planning and we are all time poor. And then, I look into that accommodation and I say, “There’s only one car spot so where am I going to put the second car if I can’t do that?”. So all of a sudden that type of concept fails the practicality test and this leads me to the view around where mainstream audiences make their decision around where they want to buy and this is really important.
Remember, owner occupiers drive the value because they buy with their hearts and not their heads so investors need to get on those coat tails to identify what we call investment grade property as oppose to investment stock which a lot of investors make the mistake of buying and they get the poor returns from those. So this video was all about just giving you little examples of what the practicality test is all about. Now, if you want to learn more about the practicality test, I encourage you to listen to our podcast called “The Property Couch“. We are going to be talking about that and are also going to be doing a more detailed video which one day is going to be in this how-to session as well and we will show you the link to get to that large video (click here to get access to the full video) and we are going to take you through the whole concept in more detail. Because the more knowledge you have about what they buyers are thinking, the better the likelihood that you are going to be buying that asset that is in the biggest demand that people really want and that pushes the value higher, which gives us the best returns. But it also affects the tenant. They are going through the same process in terms of what kind of process is practical for them when they are looking to rent a particular property in a particular location. So no doubt that it is an art, there is a science to this and I wanted to saturate in this sort of expert section around the type of thinking that goes into the idea of understanding the little nuances and these little changes that we try and identify to get the best returns when we are investing.
Thanks for watching.