High yields and massive growth: picking the perfect investment property
The word ‘ideal’ is thrown around a lot in conversation these days, and we’re used to striving for whatever our ideal may be, whether that’s a certain type of lifestyle, career or body type. When it comes to an investment property, there is little difference. Striving for a perfect property is part of what makes a better investor.
However, the word ‘ideal’ is at best abstract, and what it may look like as a property is often out of our grasp.
Based on experience, exposure and needs, your opinion of what that property looks like will alter over time.
Take these examples:
• A two-bedroom, three-bathroom house bought in New Zealand for $130,000 in 2011
• A blue chip property in Sydney’s Leichhardt bought for $450,000 in 2001
Both have been identified as ‘ideal’ properties for different investors and for different reasons, yet on the surface they have very little in common and without further analysis they may never have been identified as ideal.
Essentially, a single ideal does not exist. “There is no such thing as the perfect property deal,” says Positive Real Estate’s CEO, Sam Saggers.
But does this mean that investors can’t achieve something that comes close, or that ticks off all their own boxes?
“With a little bit of knowledge, you can make buying property profitable,” Mr Saggers explains.
Property nirvana is high capital growth and high cash flow
It’s about working through the needs of each individual, Investors Choice’s Jane Slack-Smith explains. “There is no one ideal property, your ideal property changes as your situation changes.”
While Results Mentoring’s Simon Buckingham also doesn’t believe in one singular ideal property, he describes a situation where he bought an investment that is as close to ideal as possible.
While on holiday in New Zealand with his family, he began looking in the real estate windows.
“I don’t think you can help it when you’re into property,” he admits.
A property quickly caught his eye: two standalone dwellings on one title, but with no price listed. It seemed worth asking about. He decided to start digging.
On calling the agent, he found out that it was priced at $110,000.
After a search of recent listings and sales in the area, he realised this was $80,000 below market value. It would receive $280 per week in rent across the two dwellings.
“It was well placed for growth, well located in the town and had the option to subdivide in the future,” he says. “I ended up buying it.”
Six months later, he was proven right. He had it revalued for $190,000, and extracted the equity back out, he’d already made $80,000 just by signing.
Locating the property
As Mr Buckingham describes, he found his ideal property while on holiday in a completely different country.
These unexpected finds aren’t as unusual as you might think.
“Once you get a taste of property and you’ve gone and bought something and renovated, you get itchy feet,” says Ms Slack-Smith.
On a camping holiday a few years ago, her husband encouraged her to go for a drive with him around Sydney.
Later that day, “We ended up faxing an offer [on a property] from the caravan park,” she laughs. This chance find was one of her best purchases.
“We had looked at four or five for fun, and we looked at which was the best,” she continues. “It was full of [the previous owner’s] stuff and had dropped in value.”
It was on the market for $350,000. A quick bit of research saw that it had dropped from a $420,000 listing only a few weeks before. The previous owner was an overseas buyer who had it for their child while they studied at university.
You set your goal, that’s the part that is in stone. It’s your buying criteria that changes.
Being near the university, a hospital and infrastructure, Ms Slack-Smith immediately identified the opportunities for the location, and the potential that this deal presented.
“We offered $310,000, it was neutrally geared, with a constant stream of tenants, and in a small block of units going up in value,” she says. The offer was accepted.
After a 10-day renovation for $14,000, it was revalued for $450,000. “It was a really profitable drive,” she laughs.
For this reason, the most common advice is to leave your preconceptions at the front door, and keep your eyes wide open.
Investors working off of a ‘list’ of features from the start without considering every aspect of a deal are typically going to blind themselves to opportunities like this one.
What it looks like
Investors on the lookout need to be aware of the numbers, the minimum they would be happy achieving, and how it stacks up in the current market.
If the entire market is growing at three per cent, then seven per cent could be seen as an ‘ideal’. It’s all relative.
When it comes to rental yield and capital growth, the ‘ideal’ is obviously “as much as possible”, says Propertybuyer managing director, Rich Harvey. “Property nirvana is high capital growth and high cash flow.”
To attain this, he outlines the following criteria as an achievable beginning point:
Price point: $350,000 to $600,000 (the property itself will be close to the median of the area and at an affordable level)
Capital growth rate: seven to eight per cent per annum
Rental yield: Around seven per cent
Ability to add value: Cosmetic renovation
Ms Slack-Smith explains that there are three ‘prongs’ to what she calls ‘the trident strategy’:
1. Buying below market value
2. Choosing capital growth suburbs
3. Potential to add value
“I have three ways to make money. If I screw up with my offer, and the property hasn’t been bought below the market, then I still have the other two,” she says.
Other factors she likes in a property are: a location near infrastructure and amenities, a high requirement for rentals within the area, a tight vacancy rate, and properties under $450,000.
Having these specific criteria will also make locating the property even easier.
“I define the type of property and then search by what I can afford,” she says. “Apply your criteria over the top and you might end up with three to five suburbs.”
Through these suburbs she looks even more closely at the opportunities. Her perfect properties require only cosmetic renovations, not structural, and typically these will cost $40,000 or less to complete.
“They need to be [able to be bought at] 30 per cent below median value,” she says.
In fact, she also defines that 60 per cent of the market should be renters, while the majority of the houses she will consider have two-bedrooms and carports.
This is something she calls her ‘personal’ criteria.
These criteria vary widely from investor to investor. Typically, the ideal property is one that you can buy under value, in a good market, with the potential to add value, says Mr Saggers. However, he explains that often people underestimate the importance of the selling aspect.
“Buying in a great suburb that is buoyant year in, year out, regardless of the economy [is crucial],” he says, noting that liquidity is too often overlooked.
Mr Buckingham points to five factors that he actively looks for:
1. The ability to buy at a discount to realistic market value
2. Positive cash flow before tax and depreciation
3. The ability to add value (either through subdivision, renovation or other)
4. Located in an area with short- to medium-term growth projected
5. Geographically close to infrastructure, shops, public transport, schools and other amenities
“You might not get all of these things in one deal, but the more of these boxes you can tick the faster you’ll move,” he explains.
“All that being said, it comes down to the numbers and the profit expectation of the deal. I’ve done a broad range of strategies over the years. There are factors that push you but I’ve always had a soft spot for positive cash flow, and that comes back to my personal goal of replacing my income.”
This personal goal is the underlying thread that will dictate an investors’ strategy and, therefore, which of these aspects they are likely to pick as their own ‘base’ requirements.
The personal aspect
Property is a favourite topic of conversation among Australians, and opinions are in oversupply.
It’s worth remembering that everyone has different experiences and expectations, particularly if someone is suggesting an investment to you with little understanding of your personal goals, situation and strategy.
“A lot of people I speak to are often a bit confused on what the ‘ideal’ is,” says Ms Slack-Smith. “They may have read a book and decide they want these type of properties.
“Then they speak to someone and decide that those are the ideal.
“It’s nice to read the glossy story on this is how someone made money, but the reality is you need to stand back and see what you need to do yourself. Your ideal isn’t the same.”
Every investor’s strategy is different.
“Every year you need to plan, change and adapt,” says Mr Saggers. Just as the strategy alters, so does the property that fits into this plan, and therefore so does the metric that defines the ‘ideal’.
Being aware of the financial returns required from a property is an absolute must. The goal and required returns will guide the criteria that point to the perfect property.
Those with a diminished borrowing capacity will quickly realise that a negatively geared investment will not serve them well, says Mr Buckingham.
Someone with a high income looking to offset other investments may look upon these purchases differently.
“If you have a shortage of capital, then focus on short-term growth, or value-adding deals to build up your capital bases as quickly as possible,” he says.
“Someone who has a far longer-term view is going to have a different set of financial objectives to someone looking short term.
“I’d ask them to quantify the amount of growth needed and by when. The reality [though] is that properties vary wildly in their performance over time.”
Investors should be prepared to rarely see the same growth year-on-year, even in ideal circumstances.
Despite this, sometimes a deal comes up which has great profitability but doesn’t fit their current situation. The property should never be written off immediately.
“If it’s still a good profitable deal that will help you move forward, then my view is to take the opportunity,” Mr Buckingham advises. This may exhaust future equity and change the path, so the options must be weighed up.
Some profitable deals will be outside many investors’ comfort and experience levels, making them far from ideal from a personal perspective.
“In practical terms, personalities play a part in a deal being ideal,” says Mr Saggers. “Some people have a low tolerance for [risk] situations. For them a perfectly good deal can turn into an emotional nightmare.”
Mining towns are another area commonly associated with risk and stress.
“For some people, high-yielding property in a mining town might be ideal, but some might see the resources sector and consider it as too risky for them,” Mr Buckingham explains.
Those with shorter-term strategies may have to accept properties that have a higher risk attached, or re-think their goals.
“You have to weigh up your own appetite for risk, which will weigh up the type of strategy,” he says.
Those with low-risk strategies are unlikely to consider developing or projects requiring structural renovations.
“You set your goal, that’s the part that is in stone,” says Ms Slack-Smith.
“It’s your buying criteria that changes. It’s a lower paying job, or the economy or the interest rate changes that affect your purchases.”
Don’t expect to be able to go out and instantly pick up the perfect deal
Looking at a property in isolation is only valid up to a certain point, and how it fits within a portfolio is crucial when determining whether it stacks up.
“An investor on $60,000 a year would buy something affordable. As they go further and get equity and more properties, that property has served its purpose and they would aim for something different,” says Mr Harvey. “This would change their ideal.”
When Ms Slack-Smith started investing in 2000, she looked for properties under $450,000 with a five per cent rental yield and growth she could manufacture with a cosmetic renovation. She also looked for double-digit capital growth projections.
Now, she says, her investing strategy hasn’t changed, but the buying criteria have.
Most importantly, “understand what the strategy is going to help you achieve, and then what the property looks like to help you achieve your goal,” she advises.
Within most portfolios there is a consistent tension between capital and cash flow.
“This is the most pressing obstacle or challenge,” says Mr Buckingham.
“If you’re in the early stages of your investing, and you want to build a multiple property portfolio, then your early investments should aim at building capital and preserving borrowing capacity.”
Similarly, most investors expect to maintain a diversity of assets within their portfolio, meaning filling it with one type of ideal investment might result in a less than ideal overall situation.
This can make properties notoriously difficult to pick as ‘ideal’ buys, as many investors may argue for or against a certain type of property.
The maturity of a portfolio will also affect the ideal. Mr Saggers outlines three phases of investment:
Acquisition phase: If you have fewer than five properties currently, you are in the acquisition phase, where your ideal property is going to be a ‘buy and hold’ to accumulate investments.
Ideal choices: Off-the‑plan, renovation and growth or discount properties.
Consolidation phase: Re‑evaluating your portfolio, you should be asking yourself whether your investments are on track to achieve your goals and make necessary changes.
Ideal choices: ‘Tradable’ properties through subdividing and strata titling.
Legacy phase: Leaving your investments behind.
“Buy the appropriate style of property dependent upon which phase you are currently in,” Mr Saggers explains.
Investors must always remember their strategy, even when their ‘investment ideals’ don’t align with their own ‘lifestyle ideals’.
“The idea of saying ‘I’ve got a unit in St Kilda’ may sound like an ‘ideal’ investment. It’s possibly not. That’s often confused with your personal wish list,” says Ms Slack-Smith.
“If you’re going to invest in property, it’s a numbers game. You might not be as excited as telling your friends you have a weatherboard house in Mt Gambier, but it might be better for you as an investment.”
If you’re in the early stages of your investing, and you want to build a multiple property portfolio, then your early investments should aim at building capital and preserving borrowing capacity
Being aware that a property may be in a location that isn’t on your current list is crucial, and it’s worth being flexible when it comes to a potential purchase.
“You should set criteria for the types of property you are looking for and be clear on risk and the strategies you wish to apply, using that as a filtering mechanism,” Ms Slack-Smith says.
“Don’t expect to be able to go out and instantly pick up the perfect deal. But if there’s something that ticks most of the boxes – it may have one or two issues to manage but it ticks most of them – then that could be the perfect deal at that time.”
What remains to be seen is what your personal ‘ideal’ looks like and where you will find it. Perhaps it will be the result of luck and being in the right place at the right time, as it is for a number of investors.
Despite this, success comes when preparation meets opportunity.
