Purchasing a property is probably the most expensive transaction that many people will make. Getting it wrong can mean losing hundreds of thousands of dollars – not to mention the stress. That’s why making the right purchase is so critical.
In a special series, we look at why making the right purchase is so important.
Time in the Market With a Good Property
Every buyer has their own reasons for buying property. Broadly they fit into two categories: investment or owner occupier.
Each purchase will be motivated by different criteria; buying a first home, securing an investment for retirement, needing more space, or building their asset portfolio to name a few.
Regardless of the motivation for buying a property, whether it is as an investor or as an owner occupier, making a good purchase is paramount.
This of course begs the question: what is a ‘good purchase’?
Ultimately, the common factor in every property purchase is capital growth potential, and this is the best indicator of a good purchase.
Investors may want a property with a strong rental yield to quickly secure a healthy income stream. Owner occupiers may not be as concerned with capital growth as their decisions are more often based on emotion to find their ideal home.
However, capital growth is the best way of making money on the purchase. A property is not just a place for someone to live, it is an asset. If it appreciates, it gives the owner opportunity to increase their own equity, which can come in very handy later on. Downsizing, upsizing, reinvesting, or just taking the cash to spend at leisure.
It may surprise most people that National Property Buyers advocates would only consider purchasing less than 10% of available stock on the market. Often it can be lower than 5%.
The reason for such a small number being deemed worthy of presenting an offer is because a) there is a lot of poor quality stock on the market, and b) there are a number of variables that need to align that would indicate strong capital growth potential.
Finding the right stock can be difficult. For example, a lot of the stock on the market at present is off the plan, high rise development apartments. Typically, these properties can have great difficulty appreciating in value, often due to the number of listings in a complex, and the ubiquity of complexes in any given area.
Finding good stock that ticks all the boxes is then the next challenge. Obviously, location is vitally important. But this extends to more than just a good suburb or one that will increase value in years to come. There are also considerations to be made regarding the overall quality of the property.
If the right purchase is made and benefits from strong capital growth are achieved, the results can be very strong.
A property purchased for $500,000 could grow to just over $980,000 in 10 years at a healthy 7% growth pa.
At an average of 10% growth pa over 10 years, that figure can reach $1.2million.
As the saying goes, it’s not timing the market, it’s time in the market that counts. To qualify that, time in the market with a good property is what really counts.
Seeking expert advice will give buyers the best chance of finding that good property that will appreciate in value.
Next week, we will look at some real life examples of the success of good property purchases, and what can happen if the wrong purchase is made.
Getting Expert Advice or Going it Alone: Who Would You Rather Be?
Some buyers are uncomfortable with engaging an expert Buyer’s Agent to act on their behalf when buying a property. Most believe that the cost is not worth it. Why pay someone else when you could do it yourself? Buyers know what they are doing, so what’s the benefit of hiring someone else to buy an investment property?
Engaging an experienced Buyer’s Agent shouldn’t be viewed as an expense; it should be viewed as an investment. The expertise, knowledge, and guidance of a Buyer’s Agent who is looking at property every day is invaluable and shouldn’t be under estimated.
As the table below shows, the benefit can be huge.
In this example, two properties have been compared; both were purchased for the same amount in the same year. Property 1 is a Southbank apartment on the doorstep of the city that was sold from a recent development. Property 2 is a unit in a boutique block in Thornbury purchased by National Property Buyers.
| PURCHASE | |||
| Property 1 | Property 2 | ||
| Location | City Road, Southbank | Kemp Street, Thornbury | |
| Property Details | 33rd floor apartment. 1 bed, 1 bath, 1 car space, balcony | Ground floor unit in block of 10. 2 bed, 1 bath, 1 car space, on title courtyard | |
| Previous Purchase | $420,000 in February 2011 | $420,000 in October 2011 | |
| Recent Sale Comparison | 32nd floor apartment. 1 bed, 1 bath, 1 car space, balcony in same building:
Sold for $400,000 in September 2015 |
Ground floor 2 bed, 1 bath, 1 car space, on title courtyard in same block with same floor plan:
Sold for $513,000 in March 2015 |
|
| Projected Current Value | $400,000 to $420,000 | $540,000 to $555,000 | |
| Current Capital Gain | -$20,000 to Nil in 5 years | +$120,000 to $135,000 in 4 ½ years | |
| MORE TO THINK ABOUT | ||
| Body Corporation Fees | Very high Body Corporation Fees to cover maintenance of lifestyle amenities, which could increase over time. | Low Body Corporation Fees, keeping overheads down for the owner. |
| Supply and Demand | Oversupply of similar properties in building and new developments coming onto market in the suburb dragging prices down. | Boutique block of 10 in a suburb with high demand |
| Finance | High risk market for lenders as the majority would require a deposit of at least 20% of purchase price. This will also limit the buyer pool come resale. | Lower risk purchase and lenders could loan as much as 95% of purchase price, creating a larger buyer pool come resale. |
Unfortunately, there are thousands of examples of buyers who have purchased an investment property believing they have made a good decision. Only to find they haven’t. Many of these have been promoted by the ‘Project Marketers’ supposedly promoting ‘investment grade’ stock when in fact they are incentivised by sales commissions from the developer.
Property 1 might seem like a good investment; modern, close to the city, beaches, Botanic Gardens, and with excellent views, perfect for the executive lifestyle. However, due to the factors listed above, it would not be a good investment at all.
Investing in property is a big purchase and buyers need to get it right. For many people, it will be the transaction of their lives. For a tiny fraction of the cost of the purchase, it is worth seeking expert guidance to ensure buyers have the best chance at making a strong return on investment.
Buyers can go it alone and risk making the wrong decision, or engage an expert to help them secure a high quality investment which gives them greater return; a small cost upfront for significant future gain.
Who would you rather be?
A Good Property, In a Good Position
Melbourne and Sydney have experienced huge growth in the last five to ten years, and particularly accelerated growth in the last few years. Buyers could be forgiven for thinking that any property bought in these two markets would grow in value, however as the above examples show that is not necessarily the case.
Brisbane is a different market to Melbourne or Sydney. Growth has not reached the heights of its southern counterparts, but Brisbane has become a very attractive prospect for investors. Steady growth over the last few years, strong median rents, and good value for money to secure properties close to the CBD and amenities has positioned Brisbane as one of the best investment markets in the country.
Obviously, property will attract different value in different markets. As with any market there are more favourable areas of Brisbane than others. However, even in a favourable area, one street or property can perform significantly better and it can take an expert to understand the nuances as to why a particular area or property has greater growth potential. Engaging someone who has that level of understanding can prove to be incredibly beneficial, as the below example will illustrate.
The two properties compared in the below example were purchased on the same day – 12th of March, 2012. Property 1 is a two bedroom, two bathroom apartment in a block of 25 with pool, spa, lift, and situated on a busy road. Property 2 is in a small block of 6. Both properties are located close to the CBD, the Brisbane River, and amenities and are within 550 metres of each other.
| PURCHASE | |||
| Property 1 | Property 2 | ||
| Location | Wellington Road, East Brisbane | Baines Street, Kangaroo Point | |
| Property Details | 2 bedroom, 2 bathroom apartment in a block of 25 | Renovated 2 bedroom, 2 bathroom apartment in a block of 6 | |
| Previous Purchase | $395,000 on 12th of March, 2012 | $390,000 on 12th of March, 2012 | |
| Recent Sale Comparison | 2 bedroom, 2 bathroom apartment in a block of 25:
Sold for $417,000 in November 2015 |
Un-renovated 2 bedroom, 2 bathroom apartment in the same block of 6.
Sold for $430,000 in March 2015 |
|
| Projected Current Value | $410,000 to $425,000 | $470,000 to $480,000 | |
| Current Capital Gain | +$30,000 in 4 years | +$90,000 in 4 years | |
| Equity Increase % | 5.56% | 18.8% | |
| Ten Year Estimate | Approximately $450,000 | Approximately $630,000 | |
| MORE TO THINK ABOUT | |||
| Body Corporation Fees | Higher Body Corporation Fees to cover maintenance of lifestyle amenities, which could increase over time. | Low Body Corporation Fees, keeping overheads down for the owner. | |
There are a couple of significant reasons as to why the Baines Street property achieved a greater value.
Firstly, the property was able to attract a higher value due to the renovations undertaken. Roughly $15,000 was spent updating the property; not an overly large outlay.
The property was purchased with the buyer intending to renovate, which factored into the search and ultimately the purchase. A property with strong potential to update and improve had to be found to give the buyer the best opportunity to maximise their investment. The renovations have been assessed to add value to the home, accelerating the capital growth.
The location of the properties should also be used as an example of how proximity doesn’t necessarily correlate to similar value.
Even though they are quite close to each other – only 550 metres apart – there is still a substantial difference in capital growth. Due to the smaller block size and the renovations, the Baines Street property has a significant point of difference to the Wellington Street apartment and has performed better in terms of capital growth as a result.
As this example shows, engaging an expert who is attune to the differences between property and how they can be capitalized on can make all the difference.