Times are a changing, how should you buy property in a bear market.

27 February 2012

In a recent article in BRW, titled ‘End of the Property Dream’, Kath Walters suggested that ‘sleepwalking property investors need to wake up and do their homework if they are to profit in this market’.

Never has there been a more pressing time for investors to heed the calling to do their homework when purchasing an investment property than now.

Investing in property is substantially difference from buying a home.

The intent of purchasing a home is based on meeting the needs of your family, this will include proximity to schools, work, parks and other amenities. Landscaping, pools and construction style will all factor into your decision process.

When purchasing an investment property, these features are salient, however the end goal should be to maximise returns.

The norm for most people is to apply the same logic they use when purchasing a home to an investment property. Unfortunately, investing on gut feel, and emotions will let you down in the current market.

The reason for this is the Australian property market has grown between 1995 and 2005, by more than 6 per cent per year, with an average annual increase of almost 15 per cent from 2001 to 2003.

However this was well above the average annual increase in the 20 years to 1995 of just 1.1 per cent and the 50 year average of (from 1960 to 2010) of 2.5 per cent per year.

So for the investors that purchased property between 1995 and 2005, regardless of their purchase type they have made significant returns, and any error made in poor judgement have been mitigated by capital appreciation.

Moving forward the days of high growth, have subsided, and will remain so until global confidence is restored. There is mixed reviews regarding when this will occur, but the outlook is that growth in the property market will not return to its pre1995 levels for at least 2-5 years.

Notwithstanding market conditions, property still remains a solid investment, this is due to low interest rates, strong growth in the Queensland economy, low unemployment, high net migration, strong rental demand, and low stock levels.

But the days of simply buying with the expectation that capital appreciation will provide solid returns are over. Therefore as an investor you need to conduct financial due diligence, negotiate a price reduction, and buy new.

Why these three salient points!

Firstly, understanding the financial inputs helps you to make an informed decision. Unfortunately most investor do not have the tools to view all relevant financial information in a single model. There are property analysis software available to help interrupt the data, which can be purchased, an alternative is to model the information in a spreadsheet, or wherever possible get the information from you real estate agent or property developer.

Regardless of the model of choice, it important to understand the aggregated purchase price, which includes, stamp duty, transfer fees, registration of transfer of land, title searches, conveyance charges and bank establishment fees.

Subsequently, analysing property income and outgoing cash-flows allow you to calculate any additional funds needed to service loan repayments and meet ongoing obligations.

Financial indicators, are designed to ensure that the investment property meets your criteria. Prudent investors have a battery of benchmarks targets, that they use to assess and triage investment opportunities.

The ‘property investment analysis tool’ used at 4D Development, provides a single page report of all of the pertinent financial information required by a prudential investor. It can be tailored to address the financial profile of any investor and provide a comprehensive list of financial indicators for investors to assess if the property is right for their investment portfolio.

Secondly, negotiate a price reduction, now as a developer I should not be saying this, but we all know that it’s a buyer’s market. Due to subdued confidence from investors, there is fierce competition, and developers are more than motivated to see their stock moved. Also, buying direct from the developer can save the investor thousands of dollars. On a purchase price of $500,000 the real-estate fees can range between $12,950 and $25,000 based on whether a real estate agent or a project marketer, sells the developments.

Thirdly, buy new, there are financial incentive issued by government. Queensland Building Boost Grant has been extended till the 30th April 2002, providing a $10,000 grant to investors buying or building a new house, townhouse, or unit under $600,000 in value. This is further augmented as a first home owner, who can combine the $10,000 with an additional $17,000 (first home owners grant), and not incur transfer fees.

So if you are an investor wondering, if the time is right to buy, the answer is yes. But it is imperative that you heed the wake-up call and do your homework.

Download_Property-Investment-Analysis.pdf

¹ Business Review Weekly, December 1-7 2011, page 20

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