‘Cosmetically challenged properties’ offer opportunities to Sydney investors

While investors who got substantial portfolios under their belts are able to ride the waves, budding investors may find it significantly harder to thrive in the current market.

According to Right Property Group’s Steve Waters: “We have the royal commission findings, and that’s having an effect between people’s ears and consumer confidence, but we also have the potential change of government that's coming up as well and the manifestations that follow that.”

“What some agents are finding is that sellers are hanging off a little bit. Certainly, buyers are starting to retract from the market to see what the outcome is and how it’s going to affect them.”

“But I believe that as we get closer to an election result, or depending on who wins and what they implement, we might see some artificial spikes within the market on certain types of properties.”

Still, despite the challenges, some of the markets still currently provide opportunities to investors – even Sydney and Melbourne.

After all, both capital cities are not singular property markets but a collection of multiple markets.

While reports on Sydney focus on broad numbers to support the ‘Sydney is down’ narrative, a closer look at the several areas and suburbs of the capital city shows that portions of Sydney are still thriving, even providing significant growth to property investors.

“Sydney, as a market in totality, have some opportunities in there. I don’t suggest that everybody goes out and purchase in Sydney, but certain areas do reflect fair value,” Mr Waters highlighted.

“Ultimately, this type of market gives you the best opportunity to diversify. If you’ve got exposure in one area, you could try another area to find more value.”

Opportunities in Sydney

Being one of the biggest property market in Australia, Sydney continues to represent value for investors, particularly around the market for cosmetically challenged properties.

While these ‘ugly duckling’ investments are not initially appealing to the eyes, Mr Waters reminded investors that they could definitely provide significant additional value to their portfolio with the right strategies.

At the end of the day, property investment is not about finding the most beautiful property, but establishing a liveable and affordable dwelling in areas with high demand, all without overcapitalising.

Regardless of the current conditions of the market, cosmetically challenged properties stand as great stepping stones towards building a multi-property portfolio mainly due to their affordability.

“Cosmetically challenged properties offer an opportunity and that’s one of our trigger points within the market.”

“I think you should have a mixture of different property and price brackets within a portfolio because it gives you great risk mitigation, but for those that are just looking to start off, this is a good way to get into the market, as long as they can invest money to make something a little better than it is – as simple as paint and carpet or lawns and landscaping.”

“It could increase the cash flow and the value of the property in a given amount of time, especially when you’re in a fundamentally correct market,” the buyer’s agent said.

However, not all investors can successfully implement this strategy, especially considering the tight lending environment today.

Mr Waters, therefore, advised investors to maintain good cash flow and liquidity to be able to take advantage of investment opportunities today and ultimately thrive in the current changing market.

According to him: “What usually happens is that cosmetically challenged properties are very hard for sellers to shift because they need a bigger deposit and that's hard in today's environment. On the other hand, from a first home owner’s point of view, they could be stretching themselves as it is to get the property without needing to renovate it as well.”

“It will take a certain type of buyer with a quite a large deposit to be able to do it. Those that are prepared via liquidity and have finance in place usually get the better deals at this state of the market.”

Risk management

While some areas do have oversupply due to softening demand, Sydney remains a great marketplace with good opportunities for smart property investors who have prepared themselves for the natural cycle of the market.

“Every capital will go through this softening part of the cycle, and I think the ability to adjust strategies in preparation for that time of the cycle is very important,” Mr Waters said.

He strongly advised investors to aim for a balance between cash flow and capital growth and to establish a significant cash buffer so they could ride the waves of the market cycle and hold their portfolio together long enough to see another property boom.

Acquiring negative equity may not do any significant damage on profit unless the investor chooses to sell, but it could hinder the growth of their portfolio.

According to Mr Waters: “Being reliant upon the growth that comes next cycle – nobody knows when that will happen – is not a very good position to be in. The problem with negative equity is if you want to capitalise on an investment to get ahead, you’ve got to wait. It just constricts your ability to recycle capital and to move ahead.”

“Capital is a finite resource, it can only take you so far. You need to recycle it so that you can dip in and take out and then move to the next property – rinse and repeat.”

Tune in to Steve Waters' episode on The Smart Property Investment Show to know more about the investment opportunities across capital city markets this 2019.