How The “P Factor” Can Mislead You Into Making Bad Buying Decisions

Masterminding at GoodPlaceHQ!

A very close friend of mine came to have lunch with me at Setiawalk last Friday. She had wanted to ask me about this money making idea that she had.

“Khai Yin, so here’s the deal. As you know, my cookie baking skills is pretty ninja. Over Chinese New Year, I managed to sell some $1,000 worth of pineapple tarts and kuih kapit. Everyone I sold to told me how much they loved my cookies! So I’m gonna quit my job and answer my true calling… starting a baking biz! What you reckon?”

“Pardon the pun, but that sounds like the recipe for a total clusterf*ck. Don’t do it.”

She didn’t appreciate that comment, and left without paying the bill.

The problem with friends and family when it comes to getting business advice is, well, that they are friends and family. They will never want to tell you that your ideas suck (especially when it’s true!).

For the same reason, I like the group of people that I currently hang out with (members of my Mentor’s Mastermind who had made a lot of money in the local property scene). They are not my “friends”, but rather a couple of stand up individuals whom I could count on to give me the straight talk without having to give a turd about ‘hurting’ my tender feelings.

Couple of weeks back I had written about the “P Factor” theory which asserts the importance of population growth in picking winning property investment opportunities (read this if you have missed it). During our last Mentor Mastermind meeting this became a heated topic for debate because, well, the group thought that I was over-simplifying the concept which could mislead especially those new to the game.

Below is a summary of the opposing viewpoints of the members of the Mastermind: I shall post my response in the next homebuyer guide in the following week.

Shahira: “The P Factor Is Necessary But Insufficient”

Shahira is a self-confessed uber conservative property investor who has written an article calling me reckless and accusing me of writing stuff which leave a bad taste in the mouth. Love you, Shaz!

To some extent I agree that the “P Factor” may well be the single biggest characteristic that I look out for when I look for good investments. Indeed, if the population of an area is stagnant (or worse, declining), it’s a deal breaker for me. Yes, this means that I typically never consider anything apart from Klang Valley and Penang these days. Yes, even Iskandar is out of my radar for the very same reason…

That said, my interest spikes whenever I read about rapid population increase in an area because that means that there’s money to be made in the area’s real estate. Population growth is absolutely necessary, but hardly sufficient. I will then look at the factors which drive the increase. Specifically, is there infrastructure and facilities in place to sustain the growth?

What’s important to me is generational, and not “one-off” growth. This means that transportation, schools, shopping malls and hospitals are infrastructure which sustains generational growth. “One-off” growth areas like the designation of a new industrial zone or an “education hub” is of no interest to me.

Slayer: “The P Factor Is Misleading”

The Slayer is the pseudonym of a Gordon Gekko-worshipping property flipper who happened to double up as a drummer of a cover 80’s thrash metal band.

OK, speaking from personal experience here. I once bought a house because it was an area with flourishing population. But it flopped big time… I made a measly $5,000 over six years which was pretty crap by any account.

Why did it flop then? Well, here’s the reason. While the area initially had a steady population inflow from the promise of a fledgling retail and industrial enclave, over time the interest dissipated when buyers moved on to other brighter and shinier opportunities.

Employment opportunities in the area soon dried out, and the population then slowly started to decline. Indeed, this is hardly an isolated case as over the years I have observed this phenomenon:- large areas shrink when employment dries up.

So this is what I am saying here: “P Factor” as a number on its own is misleading. Instead, you want to look at trends.  A “big” population number is not indicative of anything. On the contrary, you can almost bet on smaller areas with huge growth upside and win big.

Munirah: “Don’t Forget The Other Side Of The Equation”

Munirah thinks that chasing money in property is foolish. Read why here.

Essentially the P Factor is an indication of buyer demand. To predict pricing trends, you need indications of both buyer demand and housing supply. So, the P Factor is just one side of the equation… you need supply information also to check if an area has got potential or not.

So here’s an example. Johor Bharu and the Iskandar region has good population growth, but new homes are being built faster than the rate of population inflow. Unless demand catches up with supply, suppressed yield and below average capital growth will persist.

Of course, if there’s no demand, everything else is immaterial. From that perspective, the P Factor can be a good quick-and-dirty qualifying filter.

Ari: “Look For Growth In Income Potential Instead”

Instead of growth in population, I like to look at the growth in “income potential” instead (i.e. the “GDP” of the area). This means that I am interested in areas where there is rapid growth in middle to high income job opportunities. These are areas with higher disposable income which means that yield is above average, and this jives with my “buy for cashflow” style of property investment.

I am not denying that there is the growth in income potential is correlated to the growth in population. However, the income potential growth is a more indicative measure of the quality of a property investment opportunity.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Comments

  1. There is a massive oversupply of property in Iskandar for both landed and condomuniums.

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