What creates value in a property?
Value in property is a bit of a lowest common denominator pickle. The greater the potential market for your property, the stronger its value is likely to be. The highest value areas (as distinct from highest price) tend to hold their price or grow despite market falls. Albeit, for this privilege you can expect to pay a premium price.
Long live value
Areas with a good mix of owner-occupied and rental properties are ideal. Strong rental demand can reduce risk (if the market is in a downswing for capital growth) to hold the property for the next growth cycle, with rental returns strong enough to make this financially possible.
Property is a long-term investment, according to financial theory. Yet, like all types of finance, the savviest of investors seem to be able to spin a pretty tidy profit out of any market conditions. Investors who will last the test of time are those who do their due diligence and look to underlying value. It is pretty hard to account for likely property maintenance costs if you have not carried out a building inspection. It is pretty simple stuff, but bricks and mortar seem to bring out the most flippant behaviour in people.
While mining areas have been the greatest growth spots of late, many will prove to be a flash in the pan over the long-term. It is a risky strategy to have an investment which relies on a single mine of employment where the demand for housing rests.
The following are key considerations on what creates value in today’s market:
- Know your target demographic – learn what your target wants and what they will pay a premium for.
- Buy at a price in reach of the majority of the market (i.e. less than 600k), which is desirable to rent or sell to the largest possible slice of the market.
- Familiarise yourself with the limits to the possible supply in the area. Otherwise rental returns can easily flatten.
- Buy a sound structure. Cheap value-adding renovations rely on this.
- Increasing rental demand.
- Population growth within the area and the demographic (rising labour force participation and earnings).
- Lots of natural light and free from natural water courses and dampness.
- Neat flooring and bathrooms.
- Car spaces and storage rights.
- Small blocks of units rather than large ones. A generic asset can mean a generic return.
- Low maintenance costs and high convenience.
- Close to a large population centre.
- High WalkScore – an online metric which provides a score based on how close the essentials are on foot (such as transport, schools, cafes, sporting facilities).
- Study nooks, balcony, livability of design and use of space.
- Privacy, from others and insulation from external noise.
Chris Gray, Empire
Chris Gray from Empire targets affluent areas of Sydney, such as Bondi, where aspirational professionals are always going to want to rent and buy with an insatiable appetite. Here the capital growth stakes are high, and Chris has a debt strategy that would unnerve regular punters. He will typically buy a small block of units, do a small renovation on them, rent them out, and then get the asset revalued by the bank. Of the increased valuation, Chris will borrow more from the extra he has grown and repeat the process. Chris says he looks at roughly 200 properties to make the one purchase. Of the 200, he will want to buy ten, but only around three of those ten will the seller have a willingness to sell for a fair market price.
Lindy Lear, Rocket Property Group
One of the great ironies of the Global Financial Crisis, is that property investors such as Lindy Lear, from Rocket Property Group, went from negative gearing positions to positive gearing due to the fall in interest rates on properties she had purchased before the dip. Lindy invests in affordable properties around the country using interest-only loans.
Written by Jeremy Cabral, Publisher of top home loan comparison website, www.finder.com.au/home-loans, a free website which aims to help consumers make informed choices when selecting a home loan.