Bargain Property… Is There Such A Thing?
Bargain Property… Is There Such A Thing?
Many of us love the idea of a bargain and especially when it comes to buying property. However in my 14 years of investing in residential property I have come to believe that “bargain property” is contradiction in terms. That’s not to say they don’t exist, but if you want to make money like a professional investor your best bet is to understand the market, know what to buy and focus on buying well. While you don’t want to over-pay, neither should price be your only concern.
How To Find And Select Undervalued Property
In general, property is priced at its true market value. Good quality property is more likely to be closer to the true value than cheap property, which could be overpriced. How can this be? If a property is cheap, it is generally cheap because nobody really wants it (demand is low), or perhaps there is an issue with the property.
Investing in property is all about taking a long-term approach to growing your wealth. If you buy well in the first place, and hold onto it over the long term, you should see some great capital gains, regardless of market ups and downs. Good performance over the long term will make you much more money than you could possibly save on a ‘bargain’ property.
To use a simple analogy, ‘bargain’ property purchases are like investing in dot.com stocks versus blue chip shares. The dot.com may look like a bargain in the short term but ends up being more expensive in the long term as it may not grow and may even drop in value.
What Can You Expect From The Market Right Now?
Here in Canberra right now, we are currently in a buyer’s market – although that might change with the Mr Fluffy saga. The combination of more stock on the market and a slight uncertainty in the economy, causing some buyers to sit on the fence, means you have a higher chance of grabbing a blue chip property for a slightly lower- ‘bargain’ – price than in other market cycles.
Blue chip properties tend to steadily grow in value over the years, so if you buy and hold onto the property you can then build up equity, borrow against the property and build up your portfolio. Blue chip properties typically grow between 6 – 10 percent per annum over the long term. What this means is that if you were to buy a property for $650,000 today it would be reasonable to expect the property to be worth $689,000 within one year on 6 per cent growth. Looking at 10 per cent growth, you could expect the property to be worth $715,000 – a profit of $65,000. With the benefit of hindsight, this might seem like a real bargain.
Picking Your Suburb
Rather than trying to pick undervalued suburbs which may or may not grow, research the market and choose areas that always attract good tenant demand and have a scarcity of stock. Property research houses like RP data and Residex can supply reports into the best rating suburbs. It’s also a good idea to talk to the top real estate agents and buyer’s agents and ask other investors for their recommendations into areas that do well in booms and busts. Obviously here in Canberra, we also have free access to ‘allhomes.com’, which is also a helpful tool for analysing suburb data.
Negotiate To Get The Best Possible Price
While quality stock is usually priced at a fair market value, there are steps you can take to understand the market and get property at a slightly better price. Here’s how professional investors ensure they pay the best possible price for a property:
- Auctions: Auctions can be a great place to find a bargain but they can also be a great place to get caught out and pay well above the odds. The key is to know what the property is really worth. There will always be another property so keep a cool head, stick to your price limit and be prepared to walk away.
- Time is of the essence: It is possible to get a bargain by simply having a signed contract and deposit a few hours before someone else. Agents love the peace of mind of a guaranteed deal and $600,000 today is often worth more than $610,000 – $620,000 tomorrow, as tomorrow often never comes.
- Concentrate on the big picture. Amateur buyers can become so emotionally involved, or get so caught up in the minor details, they lose sight of the bigger picture and pay too much. Always keep your price limits and long term goals in mind.
- Use a buyer’s agent: Consider investing in expertise by using a professional buyer’s agent, who will help you search and negotiate on properties.
Everyone wants a bargain, but often bargains are a false economy. The majority of ‘bargains’ are less desirable properties in less desirable locations that aren’t in any great demand. Whilst you might add some initial value by renovating, a less desirable property is less likely to grow as much as higher demand properties in better, blue chip, locations. I believe the best possible investment for people looking to build real wealth with the least amount of risk is median priced property in an inner urban location. These properties are more likely to be priced at market value or slightly above but are more likely to hold their value regardless of market conditions.
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