Why I bought at the top of Sydney’s property cycle and delighted about it
I’ll kick off this blog by noting that what I’m about to outline is most certainly not something that would suit 95 per cent of property investors out there. Do you fit in that remaining 5 per cent? Read on and find out!
To give a bit of a background, I personally have a mature property portfolio which is spread across multiple markets and major cities across Australia. This portfolio has been built over an extended period of time with a blend of cash flow/capital growth and development.
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I also have personal experience in developing land and a sound understanding of the true costs and time involved, not to mention the insight into the lending parameters surrounding the development.
It’s the above (and the ability to understand the true feasibility of potential development opportunities) which gave me the confidence in pulling the trigger on a substantial seven-figure development recently at (what I was already aware of) the top of the Sydney property cycle.
The true crux of the matter is: know your numbers and know them well.
This particular property which I’ve recently secured has had 85 per cent capital growth in the past four-and-a-half years. That’s right! It’s practically doubled and I’ve bought at the top.
Am I worried?
Not at all.
The truth of the matter is that what I have purchased is not a standard residental ‘set and forget’ investment. Rather, it’s a 1,200sqm double block with the potential to build four luxury duplexes on.
The key with this particular purchase is not just the development potential, but the fact that we are able to secure the property off-market as part of a complicated forced trustee sale.
Before signing off on the contracts, we were also very aware of the market in which this property was secured. This market has an extremely low level of available land to create more dwellings and it sits within a blue-chip suburb of the South of Sydney. Scarcity is key, and understanding the stages within the cycle is also vital.
But above all, we were completely aware of the end buyer, their income, their desired end product and the cost involved with bringing this project to the market and the fact that based on our feasibility, our return on investment (ROI) was sitting at 26 per cent.
In these scenarios and with the current flattening of the Sydney market (which we expect to prolong for the coming three to five years), it’s important to ensure all mitigating factors have been included in the feasibility, including:
- Extended holding costs (factoring in a 12-month build and approval delay);
- End product value (factoring in a 10 per cent softening in the market as a mitigation risk);
- Build cost variables (15 per cent variable factored into the feasibility); and
- Lending costs (factoring in a 1 per cent higher lending limit)
These four aspects are in addition to the standard feasibility my team and I run for all properties for our clients, whether they be passive set-and-forget investments right through to active developments and everything in between. This means that we can invest with confidence knowing that we are fully aware of the numbers and the contingencies required to achieve a predictable outcome rather than a hit-and-hope approach.
The key of this project is that, it is a result of truly understanding the market in which you are buying in, understanding your numbers and ‘walking before you run’. Experience is key and having a crack team to allow you to build towards larger scale projects and investments is vital.