Spotting A Good Deal
There's a lot more to spotting a great deal than simply the bottom line. Brook Drake explains.
The old adage in property investment, ‘you make your money when you buy’, certainly still holds true to this day. There’s a lot more to spotting a great deal than simply the bottom line. As investors, our goal is always to find a great deal but for me, that actually means a deal whereby the investor gains some sort of advantage from the purchase.
An advantage can come in the form of instant equity, positive cash flow or even commission rebates. However, they all allow the investor to start on the front foot and be ahead from the very start.
To understand what a great deal might look like for you, you’ll first need to work out what your borrowing capacity currently is. I recommend speaking to a specialist mortgage broker and ensuring they fully understand what your goals are and what you are looking to achieve by using property as an investment.
Once that is in place it is time to start doing detailed research on your next property investment. When researching property markets in Australia, it is very important to understand that there isn’t one big property market. Each state and the different sub-areas within it, are all in different stages of their own cycles. There are literally hundreds of different property markets in Australia – despite what the press would have you believe. Some markets will make you very good money over the next few years and some won’t. So knowing where to buy, picking the boom areas is very important. There is never a bad time to buy in the right market.
One of the fundamental principles that I live by is that properties need to be cashflow positive from day one – and the higher the return the better so you are making money not losing money throughout the life of your investment. Generally if it’s nicely cashflow positive this can be a good indication that it represents good value – but of course, this has to be combined with other factors. Also, a high returning property will usually have much faster and better capital growth. So don’t go near a property that isn’t safely cashflow positive.
One of the important elements of generating that positive cashflow is to make sure that the property is appealing enough to potential renters. For people to live there it must be in a good area on a good lot and have good quality fixtures and fittings - which also helps with depreciation write-offs and your tax refund. Also, the vacancy rate in the area needs to be very low with a high rental demand. This puts upward pressure on rents and property values.
Once you’ve identified some potential opportunities that fit your criteria and that are ideally cashflow positive, you are then able to look for investments that you can potentially acquire below market value. If we can evaluate that a property is underpriced compared to the competition in the area and/or there is a special incentive on offer or if it’s the best option in an area about to boom – they are all very strong reasons to invest.
There are a few different strategies that I assist clients with that can quickly give investors an advantage instantly at the time of purchase. One for of the most effective is the duplex pair strategy – where we source the land and obtain approval to build a duplex that once built and strata titled creates an instant profit or equity of around $100k. It requires knowledge, negotiation and council approval amongst several other things to get to this stage.
After buying and selling costs the client is netting $75 - $80k without even the need for capital growth – this strategy can make a buyer an extra $75-$80k income each time. So any client who qualifies should seriously consider this great method of wealth creation.
As an added bonus for many clients I deal with, there is also the opportunity to receive a good chunk of your commission back in the form of a rebate at settlement – this is a discount off fixed price contract not available to the general public and will usually pay for their upfront costs - stamp duty, legals etc.
With any type of investment, whether you are using a professional to assist you with your purchase or if you are going it alone, the key is always to do the research yourself and know what you are getting in to. It is vital that the investment is in fitting with your long-term goals and you should map those out well in advance of making any purchase.
My final tip is to have the courage to do something – and soon!! It is never a bad time to buy in the right market and the right deal. As I’ve mentioned there are hundreds of property markets in Australia, and there is more than likely one that is getting set to for signifcant capital growth in the coming years.
They only thing I do know for sure is that If you don’t act this is how much money you will make = $0.00.