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Empower Wealth Blog post by Empower Wealth

Buying Well vs …well,… buying.

Every aspiring investor is gripped with fear about the impact of their property selection when I first meet with them. Their questions range from “where should I buy?” to “what do you think of off-the-plan apartments?” The answer is simple – there are MANY factors that you need to take into consideration to ensure that you buy well; it’s not JUST about the suburb or the property type.

The first (and most important) step that an investor must take is to figure out how much money they are prepared to spend on this asset, both upfront (purchase price plus purchasing costs), and ongoing out-of-pocket costs each month/year. Many investors overlook this second cost implication and this oversight can be damaging to any property strategy.

We once saw an investor couple purchase a cheap coastal property but unfortunately they hadn’t given any thought to tenancy demand and hence cash flow. This little asset depleted their cash flows very quickly and unfortunately they had to face the prospect of selling it shortly afterwards.

The important message in this example is that an investor should make sure that the asset they select is in an area held in tight demand by tenants, and that their specific asset is desirable to a tenant in this area.

There are many ways to do this but it does involve a combination of careful demographic research and conversations with reliable local managing agents.

The second step an investor should take is to decide what sort of ‘returns’ they are aiming for. They may want a rental return which covers their outgoings (i.e. a neutrally geared property) or they may provision a specific upper limit per month – in which case the projected cash-flow must be back-calculated to ensure the property meets their cashflow requirements.

It’s only human nature to want the best returns possible from anything you invest in – so it’s only natural that anyone claiming ‘next hot spots’ will get the attention of a new investor.

The biggest risk an investor can take though is to buy in a ‘hot spot’ without looking closer at the asset type they have selected and at Empower Wealth, we have seen some of the biggest property investing mistakes made in ‘hot spot’ areas. Many investors are lured into buying into developments which MAY be in good suburbs, but aren’t necessarily good blocks, good streets, or good options for their strategy.

A vital step an investor must take is to analyse the pocket (and street) which they are buying into. Every fabulous suburb has a less desirable area – we have not yet come across a suburb where every single property in that suburb represents a great selection.

Recently we spoke to an investor who had bought off the plan from a ‘free’ seminar introduction via a marketer. Presumably the marketer made a lucrative income on the sale and my client was left with an asset that was valued significantly under the purchase price when it settled. More so, the outgoings on the property were extremely high due to the costs associated with high rise properties. His outgoings were in excess of $5500 per year based on lifts and gymnasium maintenance.

This oversight unraveled his strategy because the outgoings meant that his subsequent investment purchase plans were inhibited since he couldn’t manage to service a second loan and given the value of the property was the top of the market the growth in values were impacted by lack of demand at the top end. His response to us was “but at the seminar they told us that the depreciation benefits would be strong”. They were, but not strong enough to counteract the negative equity issue or the tenant vacancy they were facing.

Another mistake we saw in a hotspot was a purchase of a serviced apartment. The purchaser couldn’t find a lender to finance the purchase on a normal Loan to Value ratio which meant that they had to contribute money from their personal savings. The biggest issue that they faced though was that the apartment grew less than 1% four years later. The key message that they unfortunately learnt was that an asset has to be desirable to other buyers or investors for values to grow.

Another investor we know purchased a gorgeous Victorian property which he didn’t realise had an application in local council for a high rise development directly across the road. The implication for him if the development got approval would be that his property could be overshadowed, the street would become crowded, and the ‘nature’ of the street would be severely impacted – hence the value of his property could be undermined.

There are many factors which investors should take into account when formulating their next purchase strategy. The best over-arching advice we can offer is – “if it seems too good to be true, it probably is.” Do your due diligence.

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