Since confronting the myths surrounding property investing versus share investing in my article Real Estate for the Long Run last year, I’ve come to realise that merely respecting real estate as a long-term asset has limited practical value. Those who believe in property have likely already been in the game for years, while those who avoid it are unlikely to change their minds. In this piece, I want to explore the how part, expose the limitations of mainstream property investing ideas and share a few drivers of alpha I’ve discovered myself. Why share them, if they truly are sources of alpha? Because very few people will read this and follow through, and the real estate pie is big enough for all of us. With that in mind, sharing ideas becomes a joy, especially in the process of creation.

Among active real estate investors, there are many schools of thought, including positive cash flow, negative gearing, regional, capital, low socioeconomic, blue chip, new developments, and rundown homes etc. Interestingly, if you look at them in pairs, they are in direct opposition to each other, yet each has its own loyal followers.

Alpha is Missing in the Mainstream

The thought leaders in Australian real estate investing have largely built their reputations on personal success, whereas the foundations of alpha in the stock market have been shaped predominantly by academic research. Both have their merits and limitations, with strength in theory and implementation respectively. But specific to property investing, I hold an unpopular opinion: none of the strategies promoted by property gurus or leading buyer’s agencies qualify as alpha.

By alpha, I don’t just mean positive returns, which is the baseline expectation in a rising market. Alpha refers to returns meaningfully above what the market would’ve delivered, adjusted for risk and constraints. A large number of self-made property investors built their wealth by leveraging baseline returns, in other words, by taking on elevated risks. True alpha in real estate comes from uncovering mispriced assets, structural inefficiencies, or behavioural blind spots that the majority of investors overlook. It’s not about following the herd into hotspots or parroting generic mantras like 'buy and hold' or 'location, location, location.' Alpha is earned, not marketed, which is why very few have alpha.

In the following sections, I will share three drivers of alpha where each is shaped by underlying forces that make them not just repeatable, but close to inevitable. In investing, a game defined by uncertainty, any trace of certainty must be grounded in structural logic, powered by forces as strong as the uncertainty they aim to tame.

Yield Compression From a Time Series View

Investors chase yield, especially in a high rate environment. This has led to an explosion of lists ranking suburbs and regions by rental yield. In my view, these lists are not just unhelpful; they're counterproductive. There are fundamental reasons why certain areas have higher risks in the first place, including higher risks (floor, mining, temp projects etc), lower liquidity, and weak long term prospects etc. The premium on the factors that drive the high yields in the first place will necessarily reduce due to investors jumping on them, leading to an insufficient reward per unit of risk taken.

Yield is not only cash flows. It is a reflection of how an asset is priced. Sydney, for example, will always have lower yields relative to other cities, and this is not a distortion, but a rule. Some areas naturally deserve high yields, and others deserve low yields, just like NASDAQ will always be traded at a higher multiple than SP500.

In equities, a significant shift in earnings yield typically signals a significant shift in the company itself. A company whose yield drops from 6% to 3% is usually being priced for strong growth but also lower future returns. Conversely, a company whose yield jumps from 3% to 6% is often under stress but may offer higher returns going forward. These shifts are generally interpreted as beta exposures, meaning that a higher yield doesn’t automatically imply a better investment, nor does a lower yield imply a worse one. Risk matters.

Property yields behave somewhat differently, especially at the city and suburb level. Unlike companies, which can transform quickly through innovation or mismanagement, cities and suburbs change slowly, especially in a country like Australia with rigid planning systems and entrenched infrastructure patterns. What's interesting is that the volatility in yields across suburbs often far exceeds any real change in underlying fundamentals.

This disconnect creates opportunity. When a suburb’s current yield deviates meaningfully from its long-term average, either well above or well below, it can signal mispricing. Below are two extreme examples where one market did not move significantly and was said to be an area to avoid due to this reason. However, its current yield is over 40% higher than its historical average, suggesting that its price is simply lagged behind its fundamental growth (income). Whereas the other area which people are rushing in is almost hitting an all time low in yield, trending over 20% below its historical average, suggesting an overheated and overpriced market that grows faster than fundamentals.

More broadly, this framework can help surface so-called ‘underrated’ areas. If an area is truly underrated, it will eventually be repriced. Fundamentals and income always exert gravity on price, just not immediately, and the time gap is investors’ opportunities.

Yield Divergence Between House and Units

Yield divergence is a phenomenon that Sydneysiders are likely very familiar with. In the same suburb, house prices can be several times higher than those of comparable units. While this pricing gap is particularly pronounced in Sydney, it’s a less common and often less extreme pattern in other parts of Australia.

The belief that houses consistently outpace units in capital growth has become a kind of gospel when it comes to property investing. But this narrative doesn’t hold up to economic logic. If house prices were to indefinitely grow faster than unit prices in the same suburb, the cost of acquiring land for unit development would eventually become uneconomical. Developers, who are rational investors themselves, would stop building units, constraining supply and putting upward pressure on unit prices. Over time, this dynamic ensures that the growth rates of houses and units must stay broadly in line. The divergence we see today is more likely a reflection of temporary sentiment or distorted demand driven by apartment quality scandals, not a permanent structural truth.

Interestingly this is something that few investors agree with, implying the alpha in this space would be abundant. As a general principle, the sharper the discrepancy is in a suburb, and the higher the rental yield is for units in the suburb, the greater opportunity it becomes. This is a scenario where investors can expect both high capital growth and high yield thanks to the power of mean reversion.

Temporary Friction as a Gold Mine

If the previous sections borrow from the logic of public markets, drawing on cross-sectional and time-series perspectives with a value investing lens, then friction is something unique to private markets like real estate.

In real estate, friction slows capital, but not necessarily fundamentals. When I review my own portfolio, my best-performing investments have often been those with the highest transactional friction. They were the properties others ignored, not because they lacked value, but because they were temporarily hard to buy.

Some frictions are permanent: flood zones, heritage restrictions, proximity to main roads. These factors will deter buyers not just once, but in every sales cycle. They’re inherited risks that never go away, and their pricing discounts are justified.

But a small set of frictions are temporary. Cosmetic neglect, poor presentation, fixed-term tenancies, minor compliance issues, or simply a disengaged selling agent. These situations create just as much buyer hesitation, and just as much negotiation power, as the permanent issues. The difference is: they can be resolved cheaply and quickly.

And that’s the edge. If you’re willing to absorb the temporary inconvenience and act where others hesitate you can capture a meaningful discount. That discount exists because friction deters competition, not because the asset is broken. When the issue is fixed, value is unlocked. In some cases, this can create returns that rival multi-year capital growth simply because you were willing to solve a small problem that others didn’t bother to touch.

By no means are these alpha drivers exhaustive, but they offer a starting point for investors to reflect on what true alpha should look like. Alpha matters for anyone who wants to accomplish extraordinary things, especially in a world where most returns are explained by market exposure and leverage. It’s not given. It’s earned.