Buyer's Agent Brief - Richmond, Victoria

The pandemic has changed the dynamics in the inner city apartment market in Melbourne, with a once in-demand property class falling out of favour. But what if you own an apartment and want to upgrade to a bigger house? That dilemma is exactly the scene a young couple wanting to start a family is facing in our newest Buyer's Agent Brief scenario.

Our hypothetical scenario:

Robert and Sally are a young married couple living in a modern 2-bedroom apartment in Richmond, Victoria, which they purchased around five years ago for $550,000, making around $95,000 in interest-only monthly repayments since then. They are planning a family and would like to upgrade to a detached house and have saved $50,000 to put towards the deposit. Robert and Sally are unsure whether to keep their apartment as a rental property or to sell it, while they would like to stay in the Richmond area or in close proximity. What options do they have in the current Melbourne market?

Robert and Sally have a few options.

Firstly, they could look at renting out their apartment they are living in in Richmond, which would keep it as an investment earning them a rental income and able to claim tax back.

They could move to a home which they rent instead of buy, as prices for a detached home in Richmond are quite expensive (the median price for a three bedroom home is $1,425,500 and for a two bedroom home it is $1,160,000). This would allow them to use their savings and any growth from their apartment (by refinancing it and drawing out the equity) and purchase another investment property to have a growing portfolio of two investments. 

Alternatively, they could sell their apartment and use the growth they have seen in the last five years along (median two bedroom unit price is $640,000) with their $50,000 savings to put a deposit down for a home.

Depending on what their initial deposit amount was when buying the apartment – they would have the selling price minus that loan amount plus their $50,000 savings to use towards the deposit of their home, plus stamp duties.

This would see them probably maxed out with their borrowing capacity which would prevent them from re-entering the market for some time. 

Both strategies serve different purposes – the rentvesting strategy is chosen to try and make your money work for you and grow your portfolio of assets as quickly as possible.

The other strategy is more of an emotional decision to want to own your own home – to feel free to make the choices around it and not have it owned by somebody else.

This is a common consideration, as the accumulation of real estate is widely considered a viable strategy to build family wealth.

At first glance, holding as much real estate for the long term will be one’s first reaction when asked. 

However, this scenario absolutely highlights why it is essential to fully understand the validity of such arrangements.

In my experience, not all property performs equally, and in almost all scenarios, true long term holding costs far exceed initial expectation. 

Capital growth, being the main route for profit in such an arrangement, also needs to be carefully analysed. Questionable well before COVID's impact, short to medium term growth of modern apartments is considered below standard. 

Therefore, should the main motivation lean towards financial improvement, my suggestion is that Robert & Sally must firstly, with absolute confidence, understand the true performance on offer. 

For the past five years, much of my time has been spent divesting clients from underperforming modern apartments, migrating such dormant real estate equity to a better home. 

Rising holding costs, plus more recently deflating yields and increased vacancy, are cause for investor concern. 

Subsequently, in line with imminent landlord regulative changes = greater holding costs, I expect an increasing number of investors shall in fact look towards other investment options. 

Put simply, this is a matter of accurately understanding the P&L. A return on investment exercise will very much provide Robert & Sally with the answer they seek. 

CAUTION – This may appear very straight forward, but it is where I recommend a trusted property expert and other appropriate professionals. 

Variables such as interest rates, tax liability and legal issues impact the bottom line, making the calculation more complex than first considered. 

Ultimately, they must be very clear on what they are trying to achieve & how likely this opportunity will deliver such an outcome. 

This is a space to carefully navigate with clients to ensure one's position is very well protected. It is reasonable to consider the objective in this instance is dollar related, therefore my main response, exactly how much profit is expected? Answer this with absolute confidence and the decision will be made easy.

We’re pretty numbers-based in our approach to these types of scenarios.

How much is their Richmond apartment worth? We’d advise speaking to a few local selling agents to get a clear idea, but average capital growth trends suggest that it’s worth about 8 per cent more today than what they paid for it 5 years ago – maybe $600,000.

What does a Richmond detached house cost today? You’d want to budget around $1.4 million. 

What savings would be required to purchase a primary residence for $1.4m? Assuming an 85 per cent Loan to Value Ratio, plus stamp duty, legal, and finance establishment, they’d require about $300,000 in savings.

If Robert and Sally sold their apartment, what savings could they deploy to a new purchase? They’d incur no taxes because it is their primary residence. Assuming a 20 per cent LVR on their original $550,000 purchase, they’d walk away with about $135,000 (after sales fee, etc). Added to their $50,000 savings, that’s $185,000. 

Unfortunately, purchasing a detached house in Richmond is out of their reach. But, we believe selling their apartment and purchasing a townhouse or house is the right thing for them – not only on a personal level, but a financial one.

That is because townhouses/houses with land content tend to experience far greater capital growth. In Richmond, for example, the difference was 26 per cent versus 8 per cent over the last five years.

Some nearby suburbs worth considering include Abbotsford and Collingwood. Maybe they’d be willing to consider suburbs further out from the CBD, with comparable amenities (transport, shops, cafes, etc.) such as Northcote?

When working out options, you need to start with some principles. In this case, a couple are: sell versus retain the existing home, and purchase a house versus apartment. Then, it’s about being pragmatic – being open to different options – and decisive when one feels right.

The Melbourne market is moving pretty quickly right now, so that combination of pragmatism and decisiveness if absolutely key to ensuring that they secure a property soon, before upward market trends pass them by.