Cheap investments might be more trouble than you bargained for

By Catherine Cashmore

Tuesday, 16 August 2011

As a property investor you face a mine field of advice from financial advisors, sales agents, property planners, developers, not to mention numerous magazines and books all promising the road to riches  - and never more so than in a downward phase of the property cycle.

Not unlike politics they offer a sea of differing opinions of what constitutes a good property investment, and it’s often hard to sort the wheat from the chaff.  Learning from past mistakes isn’t preferable when you’re investing large amounts of money, so it’s best not to make one in the first place.

Ironically, buyers often feel more confident purchasing into what’s traditionally known as a seller’s market rather than a buyer’s market.  Purchasing property that’s rising in value is understandably more assuring than reading weekly headlines that instigate fear we’re on the brink of a property crash. However, for those wise enough to step in whilst we’re still experiencing flat conditions, it’s important to identify a good buy from those that are simply substandard.

There’s currently a lack of quality real estate on the market – and to achieve maximum capital growth over the long term, it’s important your acquisition is attractive to owner occupiers (who fuel price growth) as well as holding appeal for long term tenancy in both downward and upward phases of the property cycle. Even in the current climate of market uncertainty, if you want to purchase a property that’s going to perform well over the long term, nine times out of 10the property you’re attracted to will also attract healthy competition from other buyers.

With sound negotiation skills there’s always opportunity to purchase good property at a great price. However if you find yourself being lured into a deal that looks too good to be true - with little competition surrounding the home - it’s time to start asking why. Vendors have usually done their homework on market value prior to listing their property for sale.  Australians don’t give up their houses easily – it’s one of the reasons house prices in Australia are more likely to stagnate for periods of time than drop.  Most vendors will hold rather than sell in a downward market, and the value Australians place on their property is heavy with romantic aspiration.

Therefore, if it looks like they’re giving the home away it will be for one of two reasons – they’ve hit a financial dilemma and need a quick deal, or they want out of a non-performing asset or money pit. It’s important to make sure you walk in with your eyes open.

It’s not unusual to hear about distressed sales, or quiet off-market listings, and in such circumstances a reduction in buyer competition is always advantageous.  However, this doesn’t mean the vendor is desperate to sell or the price is below market value, it usually means they will sell ‘if’ they can get the price they’re looking for.  So, before you whip out your wallet, make sure you’re not assuming otherwise.

One of the most concerning acquisitions widely touted to investors are off-plan developments or house-and-landpackages.  Some sellers often disguise themselves as ‘free’ buyer agents picking up their fee directly from the developer.  When you purchase off plan you’re taking a punt the property will continue to appreciate in value.  With established dwellings it’s possible to trace the sales history for reassurance of capital growth; however off the plan dwellings don’t offer the same luxury. They come with a promise of high rental yields and depreciation benefits; however you have no guarantee that the look, feel and design will fulfil expectation.  You’ll usually be charged a premium on price (much the same as you would with a new car) – and like a new car, the price is unlikely to hold value without risk of initial depreciation once the word "new" has disappeared from the title.

Remember, as an investor, you’re not purchasing the home for yourself; you’re purchasing it to attract a long term tenant and – if you decide to sell – hopefully an owner occupier who’ll be prepared to dig deep.  Therefore identify the demographic you’re targeting. Who’s going to live in the property? Are you buying an apartment in an area which mostly attracts families who won’t be interested in your ‘shoe box’? Is the location desirable or are you purchasing on a main road, close to an industrial zone, or in a far off field away from local amenities? Is a flash renovation covering poor bones, or are there strict heritage overlays which will make future renovation or development problematic?

Finally – if the word accommodation is preceded by ‘student’, ‘defence’, ‘serviced’, or listed with ‘huge stamp duty savings’ probably best to steer clear. It may look attractive on paper, but without considerable due diligence, there’s a good chance capital growth will be limited, on-going corporation fees invariably high, and you’ll find yourself walking into a greatly increased ‘risk v reward’ scenario.

In most circumstances, a good property will sell well in all markets.  Therefore, cheap properties are cheap for a reason, so before you purchase, find out why.

Catherine Cashmore