We are often asked about our approach to property investment. People love to hear about magic formulas and the secret to uncovering the next hotspot. I am afraid that it isn’t that simple! There are a lot of myths and dreams about property investment in this country and many people have an unerring sense of positivity about real estate. But there are many pitfalls for the unwary, so we tend to recommend a conservative approach.
Following is an overview of our investment property buying process. Remember that we focus our attention on the 10km radius of Sydney’s CBD, but I think you will find the principles can be applied to any market.
Step one – Identify the financial goals and risk profile
We recommend that our clients speak with a tax advisor and/or your accountant about such things as leveraging and negative gearing so that they can determine which is more important – capital growth or rental yield.
Where you are in your life cycle, your debt structure and whether or not you have an existing property portfolio and the time period you intend to hold the property for will be factors that should be taken into account to determine the amount of risk you are prepared to take. For instance, are we looking for a renovated home in a blue-chip area? Or are you wanting to buy in an upcoming area and wait for gentrification to boost price growth? Or are you prepared to renovate to add value?
Step two – Determine location/s that will support these factors
Once we know the level of risk that our clients are prepared to take we can narrow down likely suburbs – we will determine whether an area is safe, emerging or a likely candidate for future gentrification.
In all locations we take into account lifestyle factors (cafes, shops, parks, access to beaches, etc), the median price in relation to the budget, transport, infrastructure and the potential to appeal to a broad market (people need reasons to live there other than simply because it is close to work).
Step three – Property search and selection
We are specialists in identifying a property that is likely to grow above the median growth rate for its suburb. We can do this because we know what sort of property sells well in each area and we gained this knowledge in our years as selling agents. When you stand at the door of houses that struggle to sell, you learn what attributes a property needs to make it appealing to buyers. The basic premise is that we look for property with wide appeal to owner occupiers (or where you can make improvements to create this) and this ensures that when you go to sell you are likely to get good buyer interest, which is turn leads to competition, which is needed for top sales prices.
Step four – Assess the yield against our benchmarks
An essential part of our due diligence is to test the “numbers”.
We keep a close eye on the rental market and set benchmarks which relate to current market conditions. For instance our current minimum acceptable net yield is 4%. And we look at the net yield rather than gross, particularly with strata properties where the levies can vary widely.
The exception to this rule would be where we are buying in an emerging market or with an intention to renovate to improve the yield.
Step five – Determine property value
Without a solid understanding of the property’s value you simply cannot determine the best purchasing strategy. We literally spend hours getting our pricing research to the point where we can make a recommendation to our client that both of us can be confident in. For investors this is particularly important as it gives us a clear cut-off point for negotiations. If somebody else is prepared to pay more – let them. Part of the capital growth equation is the entry price, so this is not something that can be glossed over.
By understanding value you can know whether the agent is bluffing when they say they have a higher offer. Or you can determine whether the agent is under-quoting in an auction campaign, which can generate a lot of buyer interest. Sometimes they get the pricing wrong and end up over-quoting, which could result in a good opportunity to buy at auction without competition!
Step six – Other due diligence
This is where we pull together all the other information we require to help our clients make a sound purchasing decision – strata reports, legal advice, building & pest inspections, council checks, bank valuations, renovation advice, sales history, agent modus operandi, likely interest from other buyers and whatever other areas we need to cover in relation to a specific property – sometimes we even knock on the neighbours’ doors! There may be deal-breakers hidden in the detail, so no stone is left unturned. But keep in mind that we need to turn around this due diligence in a very short period of time so that we can be in a strong position to proceed to negotiation and enhance our competitive position.
Step seven – Negotiate
Every negotiation is different because there are so many variables: the method of sale (usually auction or private treaty), the vendor’s state of mind and motivation, the agent’s practises, market conditions at the time, the presence or absence of other interested buyers, not to mention our client’s specific requirements. So we must develop a strategy for each and every property we pursue.
The two most important elements to maximise success at this stage are a sound understanding of the property’s value and being ready to sign a contract. We see many buyers making premature offers – before they fully appreciate value or before they are ready to sign on the dotted line. This is not something we would recommend for a number of reasons, not the least being that you can unwittingly start a bidding war that you are not equipped to win – or you get drawn into it and end up paying too much. So the bottom line here is that with all the due diligence in place we can set a clear negotiation strategy and proceed with confidence. Or we can have the clarity to know when to walk away. This is the most powerful position to be in when it comes to property negotiations.
We are in the business of buying property, so all of this comes pretty naturally to us after all these years. If you want to buy wisely and avoid the pitfalls of the uninitiated, nothing will replace good old market knowledge. Get out there, inspect as many properties as you can, attend auctions if you want to buy in an auction-oriented area, review the sale prices of all the properties you inspect and try to work out why some went well and others didn’t. And remember that location isn’t the only important element, the property selection and what you pay for it are key to making a wise investment decision.
For more information on what attributes a property needs to be a top capital growth performer, read “Nine things to look for in a property.”
First published – Feb 2015
Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.