How buyer's agents pick the best performing properties
When it comes to picking property winners that will benefit you from capital growth, there is no particular formula to follow. Every investment opportunity comes with risks, but Property Observer has asked a group of buyer’s agents to share a property they’ve bought that made an impressive capital gain and one they learnt a lesson from. Each agent was asked about the property and why he or she chose it.
Read below for some tips for your next investment choice.
Rich Harvey, buyer’s agent and managing director of www.propertybuyer.com.au
Investors get confused between “Research” and “Search”
We all dream of finding an amazing property deal that will provide incredible returns to give us financial freedom. However, the reality is that property investment is a long term game and we need patience, fortitude and wisdom to do well. I see so many investors get impatient and sell out too early and miss out on the best years of growth when a property cycle turns upward. I also hear of investors rushing into new off plan deals because the brochure looks nice and they can see themselves living there when the market fundamentals do not stack up.
Property investment in the first instance is about picking the right area before drilling down to individual property type. Investors get confused between “Research” and “Search”. Research is about understanding the dynamics of the local area, the micro and macro factors that will drive a local market – i.e. demographics, population growth, infrastructure, employment, supply and demand. Searching is about looking at what property types suit the local area and are in the highest demand. Then it’s about the individual characteristics of the property itself – construction type, floor plan, finishes and inclusions etc.
With over 15,000 suburbs to choose from investors can face an overwhelming challenge to pick the right areas. Fortunately there are some clever research tools that we use as Buyers Agents to help shortlist both suburbs and properties.
I have bought a multitude of properties that have performed well over the long term.
As a buyers’ agent I regularly come across “off-market” deals via our extensive network of agents. I purchased a property in Leichhardt in Sydney’s Inner West back in mid-2007 for $645,000. It was a tri-level townhouse with four bedrooms, 2.5 bathrooms and a very rare double lock up garage. At the time the rent appraisal was only $650 but I knew this was under-rented and with some minor renovations it could increase both yield and value. The property was located very close to Norton Street, which is the main shopping strip of Leichhardt with the Italian Forum shopping centre, trendy cafes, bookshops and other boutique stores. Although under the flight path, Leichhardt is close the CBD, with good road, bus and light rail links nearby. The Inner West of Sydney is a solid performing area for capital growth and contains a good mix of property types.
I chose the property as it was located in a quiet street and in a small block of only five townhouses (low strata fees), close to schools and shops, and the double garage - which was a rare as hen’s teeth! Internally, the property had a good layout with average size kitchen, living and diving and outdoor terrace, leading to a small grassy yard. There was also a small study on the ground floor with its own courtyard. On the first floor were three bedrooms and two bathrooms (main with ensuite). On the third level was a huge open plan rumpus area which could be used as a teenagers retreat/ extra bedroom or fabulous home office.
It could be rented to a wide range of potential tenants and we never had any vacancy issues. We were able to raise the rent each year in line with market increases and got the rent up to $950 per week. I recently sold the property for $1.03 million to pursue other investments, so made a solid capital gain of almost 60% over six years (i.e. 9.9% per annum). I would have been happy to retain this property as part of my portfolio but there also comes a time when it is appropriate to sell and take a profit.
Jacque Parker, director of www.housesearchaustralia.com.au
Smart buying occurs in the price range where the majority of residents in the area can afford to rent
I purchased a "bread and butter" freestanding house in Singleton at the end of 2001 for IP purposes. Wanted to stay around the affordable/median price for the town (as I've done with all our residential investments) and searched for a property that would appeal to a wide variety of tenants (3x1x1 with decent yard and easy walk to town centre).
We chose this town as it was affordable for our budget - sub $100,000 - at the time. We had some familiarity with the area and knew the town was large enough to support more than one industry such as agriculture, defence force and mining. We also wanted something that lent itself to a renovation if we decided to increase value. In the 12 years we've owned it, the rent has increased from $150 per week to $330 and the value has increased from $85,000 to $320,000. That's a 274% increase in 12 years, which we're happy with.
The property has consistently returned us an increasing positive cash flow, with very little added over the years in terms of costs. We have repainted, conducted minor repairs and added new blinds only during this period. We have been fortunate enough to have an excellent caring tenant during the majority of our ownership and out of our entire portfolio, it has provided the least headaches. What we learnt from this investment is that smart buying occurs in the price range where the majority of residents in the area can afford to rent. Doing our research beforehand certainly helped in ascertaining this, as well as having local knowledge of this particular area and town. It also has killed off the long-held myth that there is little capital growth to be had in regional areas!
Philippe Brach, buyer’s agent at Multifocus Properties and Finance
Cash flow has to be manageable
I bought a three-bedroom townhouse in St Lucia in Brisbane in late 2004 for $320,000 that was rented to a coffee shop owner for $380 per week. He vacated three weeks later and ever since I have permanently three overseas students from the nearby Queensland University Campus (1.5km away) and the rent jumped to $500 per week straight away.
Currently, the property is valued at $600,000 and with the upcoming increase in prices in Brisbane I am confident that this will jump again. In addition, I now collect $630 rent per week. So it is a nice combination of being cash flow positive and great provider of capital gains.
The only property I bought that underperformed was an over 55s unit in Eagleby, south-east Queensland. It was an experiment for me. I paid $90,000 for it in 2005 and it is worth about $85,000 now. The rent is great – currently $250 per week – so it is comfortably cash flow positive, but capital growth is non-existent. I assumed at the time that, since pensions increase by 2% above CPI, capital growth would follow the same progression. It brings me some cash, but you are never going to get seriously rich with a cash flow alone!
My philosophy is that capital growth is definitely the name of the game, but cash flow has to be manageable. Buying a strongly negative cash flow property that promises great capital gains can be reckless unless you have too much cash to burn.
Damian Collins, managing director of Momentum Wealth
Fundamental property principles - Land value is what goes up while buildings depreciate
We have purchased a number of properties that have performed exceptionally well for clients. One recently springs to mind is a client purchase that was just sold for a substantial profit. The property is in the Perth suburb of Kewdale.
We purchased the property for $515,000 in March 2011 and the client sold it in December 2013 for $761,500 without doing anything to it. This represented capital growth of 47.9% in the period of 2 and 3/4ths of a year when the Perth market median has grown only 5.1% over the same period. We have had a number of similar results for clients. Our research team had identified rezoning in the area and predicted a rapid re-rating in the market of any property with development potential. Our Buyers Agent team targeted this area for clients looking for development opportunity and many clients are up around 50% in around two years.
A property that I've purchased that underperformed would be a unit I purchased myself many years ago in the early 2000's. I sold it a few years later for a small profit, however it had underperformed the market. I realised quickly the importance of sticking to fundamental property principles - land value is what goes up while buildings depreciate. As long as you understand that you can make more informed property decisions.