I was told a long time ago that it doesn’t matter what real estate we buy. Whether it’s a 1 bed, 3 bed, water view, no view, ground level, 10th level, 40m2 or 500m2 etc. every real estate will eventually grow in value over time. I was told, ‘just be patient’ and wait for the long-term ROI. This is complete nonsense.
It’s simply a way for agents & developers to convince buyers to purchase the property.
Many properties that stand in desirable locations, such as near water or shopping centres or in the heart of the CBD, will not necessarily make you money in the short term or even in the entire investment cycle.
A lot of agents use impressive brochures and videos to support their pitch. These marketing materials show us the luxury style of the internal home, nice sofas, flower bouquets, a king-size bed, the dream walk-in wardrobe and a sparkling white kitchen. We’re shown people walking at the beachfront, surfing, eating ice cream, reading books, kids playing in the park, hikers on the green mountains. However, these attractive lifestyle scenarios are not relevant to the term investment.
Especially with new properties, introduction videos present less than 1% of the property and usually present the most expensive floor plan with the most luxury items. 99% of the video is simply presenting a lifestyle dream with emotionally evocative music. The aim of the video is to affect the buyers’ emotions and to sell the entire environment.
These tactics are irrelevant to the property’s true investment potential.
I encountered a lot of marketers who try to sell the wrong asset class in the wrong suburb with biased research and marketing materials. For example, there is a lot of pressure to buy in Sydney South West, and a lot of investment firms focus on this area. The area is transforming and soon it will have a new airport but it still doesn’t have the right economy. The area has a lot of vacant lands opportunities that drive many stakeholders to build and redevelop. It creates massive oversupply, and in fact, we can see prices decrease. Although affordability is one of the main selling tools the risk is high, which means that capital growth won’t be seen in the foreseeable future.
Also, because it’s very hard to sell in these tough areas, sales commissions are usually very high too. This makes agents particularly interested to sell there, offering generous incentives to buyers and using misleading, biased marketing. However, at least the ‘hard to sell’ factor means there are a few smart people out there who are cautious about spending their hard-earned money!
There are many high-risk areas across Australia in which developers and vendors offer high incentives and returns to the sellers and buyers, so again risk validation is a must for every single buyer.
A high percentage of buyers don’t understand that investment is totally different from just buying real estate.
When we buy real estate investment, we need to make sense of the purchase based on carefully analysed data. To make a healthy ROI, it’s not just the property prices that matter, but the risk factor too.
~ Invest in Properties’ buying and detection approach is simple, transparent and reliable
~ We use independent sources.
~ We remove the frustrating guesswork leading to wiser and clearer buying decisions.
~ The result is good property milestones in your property portfolio that will increase your ROI over the investment cycle.
Facts
- A property cycle is around ten years with a variation of 5-7 years for the housing market and 10 plus years for the unit market. This varies from suburb to suburb.
- Houses have a land component which appreciates in value. However, because apartments and units often share the same land and communal areas, they can depreciate.
- Apartments, buildings, and other complexes are harder to sell than houses, leading to more marketing materials. Most of the data focuses on the benefits of the project and the look and feel of the property but not on the actual ROI.
- We all prefer small complexes or standalone homes with fewer neighbours or common walls. However, before investing, each investor’s financial position must be carefully analysed using appropriate data.
- Standalone houses have Torrens titles and units have Strata titles. Strata titles can impact cash flow, especially buildings or resorts that have communal facilities such as BBQ areas, pool, gardens, rooftop, cinemas, gym, concierge etc. Properties with Strata titles will be harder to turn into positive cash in the first and second cycles.
- Apartments become attractive when it comes to lifestyle factors, such as proximity to beachfronts, walking distance to the train, shops, and entertainment and business districts. However, houses prices in the same location can be unaffordable.
- Units have more tax advantages, especially in new or relatively new developments, as there are more walls and common facilities that will depreciate. Whereas even new houses benefit from fewer tax benefits. However, the tax portion is a very small percentage of the whole deal.
- Every suburb across Australia has a different property cycle. Suburbs are impacted by regions and influenced by the economy, which drives the price up and down.
- Each asset-class – unit, townhouse, house – is matched to a single suburb. For example, a good, low equity risk in Suburb X may only be suitable for houses. Other asset classes, even if they are more affordable, won’t be a good fit for this specific suburb in terms of risk and return.
- Every asset class in a particular suburb will only be a good fit for a specific property configuration. This means that it wouldn’t be wise to buy a 2-bed townhouse in Suburb X if the preferred configuration for low equity risk is 4-bed.
- With regards to units, even the most luxury new projects, they must always be valued at 50% less than any established pre-existing house in the same suburb.
- A good layout is important. It’s more suitable for long term tenants who can benefit more from the dwelling.
- Good layout and three-plus beds with a minimum of 2 bathrooms will be attractive to owner-occupiers and families who will pay more than the market value at the time of selling. Assets that are only pure investments (small and without a good layout and with too few bedrooms and bathrooms) will only attract seasoned investors looking for a bargain. This will mean we don’t maximise our profit.
- In general, off the plan properties associate with higher equity risk than established properties. Houses with good land size have the lowest equity risk, then small houses such as townhouses and then all the unit properties. However, it can vary based on individual suburbs where the owner occupiers and investors ratio is different. Influencing factors include supply versus demand, new stock in the pipeline, specific locations with a strong demand for apartments, and maybe some off the plans proposals.
There are many more important considerations, but these are the essential basics that you will need to make well informed decisions.
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Write to us: money@investinproperties.com.au
9 Step Checklist – Where & Which Asset to Invest in?
- Assess your budget. It’s best to get a reliable broker to assess your borrowing power and the approximate purchase price.
- Formulate a direction using your defined strategy and risk profile. You may want a place to live but you also want to make sure it will be a good purchase.
- Map your desired suburbs in states or cities across Australia. Keep referencing the budget and strategy.
- Map asset-classes in the detected suburbs.
- Find a list of properties in the detected suburbs with the preferred asset-class and preferred configuration.
- Check the layout. It should be matched to owner-occupier interests and not to investors.
- Go to the field and inspect the actual size & the position of the structure on the ground. Check the level, the entry, the condition, the noise disturbance from the road, schools, and retail etc.
- Check council maps, plans and zoning. Be aware of potential new projects & infrastructures.
- Get a risk report to validate the property’s risk and return. Risk reports use a lot of critical factors and percentiles that verify the investment numbers (price, rent, past and outlook). The report also includes other information such as block size, complex units’ size, vacancy rate, owner-occupier vs investors ratio, time on the market, medians, new properties in the pipeline for the next 24 months and more.
~ Invest in Properties can create your risk report ~
When you have the risk report on the particular property, it will be a great tool to negotiate the price with the agent and even have the confidence to bid in an auction. The risk report is an essential aspect of making a truly well-informed real estate investment.
Need assistance with the risk analysis and review? Or with the entire buying process?
Feedback, questions or concerns?
Write to us: money@investinproperties.com.au
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