In over two decades of investing in residential property I have come to believe that “bargain property” is an oxymoron. If you want to make money like a professional investor your best bet is to understand the market, know what to buy and focus on buying well.
How to find and select undervalued property
In general, property is priced at its true market value. Good quality property is more likely to be closer to the true value than cheap property, which could be overpriced. How can this be? If a property is cheap, it is generally cheap because nobody really wants it.
Investing in property is all about taking a long-term approach to growing your wealth. If you buy good stock and hold onto it for ten years or more, you should see some great capital gains, regardless of market ups and downs. That is a true bargain.
It’s like investing in blue chip shares versus dot.com stocks. The dot.com may look like a bargain in the short term but ends up being more expensive in the long term as it may not grow and may even drop in value.
What can you expect from the market right now?
We are currently in a buyer’s market. The combination of more stock on the market and a slight uncertainty in the economy, causing some buyers to sit on the fence, means you have a higher chance of grabbing a blue chip property for a slightly lower- ‘bargain’ – price than in other market cycles.
Blue chip properties tend to steadily grow in value over the years, so if you buy and hold on to the property you can then build up equity, borrow against the property and build up your portfolio. Blue chip properties typically grow between 6 – 10 per cent in the long term. If you were to buy for $650,000 today it would be reasonable to expect the property to be worth $689,000 within one year on 6 per cent growth. Looking at 10 per cent growth, you could expect the property to be worth $7125, 000 – a profit of $65,000. As property values often double every seven to ten years, this is the real bargain.
Picking your suburb
Rather than trying to pick undervalued suburbs which may or may not grow, research the market and choose areas that always attract good tenant demand and have a scarcity of stock. Property research houses like RP data and Residex can supply reports into the best rating suburbs within your state. It’s also a good idea to talk to the top real estate agents and buyer’s agents and ask other investors for their recommendations into areas that do well in booms and busts.
The research houses always give good ratings to inner urban suburbs such as Albert Park, Middle Park, St Kilda, Elwood, Elsternwick, Prahran, South Yarra, Armadale, Hawthorn and Richmond in Melbourne and Sydney’s eastern beaches from Maroubra to Bondi Beach, the inner west suburbs Leichhardt, Annandale and Balmain and north shore harbourside suburbs including Neutral Bay, Kirribilli and Cremorne.
For those with their heart set on finding the latest hotspot as well as staying blue chip, some have tipped Maroubra to be the ugly duckling of Sydney’s eastern beaches. In Maroubra buyers can find properties around $100,000 cheaper than the neighbouring beaches. Developers and renovators are moving into the area and with more and more people recognising the suburb’s merits, Maroubra could represent a rare chance to find a bargain within the Sydney market – but you will need to get in quickly.
Buy a bargain, renovate, and watch your wealth grow
In November 2008 my company, Empire, paid $620,000 for a unit in a small block of seven units at Coogee on Sydney’s eastern beaches. Coogee fits the bill for investors: it is close to the CBD, where professionals work, and has all the leisure facilities professionals look for: bars and restaurants, shops and, of course, the beach. In less than two years, and before any renovations were made, the units were valued at $800,000.
We are currently going through council to double the size of the block, render it and extend the balconies which will add tremendous value to every unit. Internally we’re likely to also spend $70,000 on it which should see its value increase a further $100,000 – $120,000.
Renovations require time and skill. I always outsource to a professional who can manage everything, and will get the job done to a very high standard very quickly. This requires an upfront spend but the property will be ready to lease or resell far sooner, so you can realise the capital gains on your bargain buy.
I didn’t buy the property cheap, but buying the right property and adding value has given me something that is now ‘cheap’ compared to if I had bought it after the work was done.
Negotiate to get the best possible price.
While quality stock is usually priced at a fair market value, there are steps you can take to understand the market and get property at a slightly better price. Here’s how professional investors ensure they pay the best possible price for a property:
- Silent sales: unless you have a network of industry contacts you are unlikely to find out about silent sales, so you need to invest the time in building up these networks or invest in a buyer’s agent who already has contacts and will be in the know about properties before they hit the market.
- Auctions: Auctions can be a great place to find a bargain but they can also be a great place to get caught out and pay well above the odds. They key is to know what the property is really worth. There will always be another property so keep a cool head, stick to your price limit and be prepared to walk away.
- Time is of the essence: It is possible to get a bargain by simply having a signed contract and deposit a few hours before someone else. Agents love the peace of mind of a guaranteed deal and $600,000 today is often worth more than $610,000 – $620,000 tomorrow as tomorrow often never comes.
- Concentrate on the big picture: Amateur buyers can become so emotionally involved, or get so caught up in the minor details, they lose sight of the bigger picture and pay too much. Always keep your price limits and long term goals in mind.
- Use a buyer’s agent: Consider investing in expertise by using a professional buyer’s agent, who will help you search and negotiate on properties.
Everyone wants a bargain, but often bargains are a false economy. The majority of ‘bargains’ are less desirable properties in less desirable locations that aren’t in any great demand. Whilst you might add some initial value by renovating, a less desirable property is less likely to grow as much as higher demand properties in better, blue chip, locations. I believe the best possible investment for people looking to build real wealth with the least amount of risk is median priced property in an inner urban location. These properties are more likely to be priced at market value or slightly above but are more likely to hold their value regardless of market conditions.