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Why the cheapest properties could be the costliest investments
As the property downturn sends prices tumbling, bargain properties are attracting investor attention, but cheaper doesn’t always mean better. A buyer’s agent with two decades of experience shares how to spot good deals in the current market.
As investors seek out bargains, a discounted purchase in a failing market can quickly turn into a pricey mistake, costing tens of thousands and eating away at buffers and potential equity.
Right Property Group founder Victor Kumar said that before buying cheaper properties, investors needed to ensure each asset stacked up on key fundamentals, including rentability, liveability and sellability.
He said that while investors loved a bargain, they should not always favour a lower price or higher yields, as good-value properties weren’t always found in typical “blue-chip” suburbs.
“The basic thing about this is that you should not stray away from fundamentals and just because something is discounted, you buy it,” he said.
“The reality of it is, in a market like this, most of the properties that are selling are selling because they have warts on them and these warts might not be curable.”
Here is Kumar’s advice to pinpoint solid deals:
Check compliance risks
In addition to the usual due diligence checks, such as a pest and building inspection, Kumar said investors should assess properties for compliance issues before buying.
He said while investors may overlook flaws and defects while seeking low prices and high yields, the risks may not be worthwhile if there are fundamental issues that cost thousands to rectify.
He said while Melbourne apartments were often relatively cheap and provided solid rental yields of 6–8 per cent, the overarching data didn’t necessarily tell the full story.
Kumar said some high-rises were built with flammable cladding, potentially breaching the state’s building compliance laws.
“In this scenario, at face value, this looks very successful because you’ve got minimal operating costs, but you’ll have major contribution costs, capital costs, once those fire rating issues start coming to a head,” he said.
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When considering an investment, Kumar said investors ultimately needed to look at the broader picture, including embedded issues and compliance matters, rather than just at the headline figure.
“We need to look at the compliance issues that are roaring ahead towards us – there’s a report readily available in Victoria that speaks of the volumes of properties that have compliance issues with the flammable facade,” he said.
Look beyond typical ‘blue-chip’ suburbs
Kumar also told investors to look beyond the preconceived idea that a quality investment had to be expensive and located in a prestigious suburb, as good deals can be found in any area.
He said a “blue-chip” suburb was a broad idea that has applied to different types of properties over time, rather than automatically indicating value.
“In the industrial age, all the factories and everything were close to Sydney city; hence it became a CBD so the people with money were living in the suburbs, living on farms,” he said.
He said Sydney’s dynamic shifted over time as workplaces became decentralised, with Bondi Junction, Manly and other coastal suburbs becoming regarded as prestigious and lifestyle areas.
Rather than being limited to the typical prestigious markets, he said blue-chip investment opportunities can be found in relatively affordable or outer-suburban areas, as quality can vary significantly from one street to the next.
“You could go out on the outskirts of any state, and you’ll have one street that does not stack up as much or tick one of the boxes of fundamentals,” he said.
“Whereas the next street ticks all the boxes and that’s [considered] ‘blue chip’ for that suburb,” he said.
Watch out for fixer-uppers
Kumar said that while bargains might need updating, investors should distinguish between fixable issues that offer renovation potential and properties with fundamental problems.
He advised avoiding drawbacks that cannot be changed, such as proximity to busy roads or railway lines, power lines, and exposure to bushfire or flood risks, as they could undermine the investment.
In contrast, he said properties requiring relatively straightforward cosmetic work, such as painting or replacing carpets, could offer an opportunity to improve their appeal and attract better-quality tenants.
“We look at, okay, is there cosmetic opportunity or structural opportunity on the property? Would it need more skills or is it just about getting a handyman in there to paint carpet?”, he said.
However, he cautioned that renovation costs may not always translate into an equivalent increase in property value, especially if a property had structural defects.
“If there are structural works involved, the lender may be skittish, especially in today’s market where you’re likely to be dealing with a second or third-tier lender and they’re pedantic about the property’s condition because they know they are liberal with their calculations of their loans.
Kumar added that investors considering renovations in a falling market should move quickly, rather than spending several months completing works, as further price declines could erode the equity they could gain.
“You need to be in and out really quickly so that you’re then refinancing or recapitalising in the same market,” he said.
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