Property Research Checklist
Having now engaged your experts, the next step is to do your property research.
While some opportunities may look good on the surface, without doing your property research you could be saddled with a property that doesn’t perform as it should, costing you money in the long-term. Regardless of what the salesperson says (whether they are a sales agent, project marketer, property spruiker, developer or ‘expert’), BUYER BEWARE is always the rule of thumb to work with when purchasing property.
By understanding the various property types available and growth drivers, you’ll have a better foundation from which to assess your property investment options.
The main residential investment options include buying established property, developing or buying property off the plan.
Buying Established Property
The argument for buying established property is that when you buy a property which is over ten-years-old you aren’t paying a developer a profit (as they already made their profit in the original sale). Also, as the building has already depreciated, you are buying it for a higher percentage of land value and lower percentage of building value overall. At a minimum you want to aim to invest for 50% land value (land to building ratio).
The main risk considerations for established properties are selecting the wrong type of property, buying in the wrong location, not knowing your market (tenant or future buyer), rental yield risk and not understanding the drivers of growth that make the property a viable purchase.
Off The Plan (OTP)
Off the plan properties refer to house and land, houses, townhouses, and unit and apartment developments where you purchase the property based on the plan of what it will look like upon completion. It will involve a contract of sale pertaining to ownership of a specific land or unit lot, and will contain a substantial number of clauses, usually in favour of the developer. Often there are ‘sunset’ clauses which allow the developer to withdraw from the executed contract of sale after a specified period of time without penalty, sometimes for no reason at all.
The main risk considerations for off the plan properties are market value risk, construction risk, settlement risk, rental yield risk, developer risk and builder risk
Developing is when you change the nature of the land by constructing property for profit. It could be a simple subdivision of a block, developing a single unit at the back of an existing house, developing a few units or townhouses on an empty block, or building a low rise residential apartment complex. Developing can have potentially high returns, which is why it appeals to so many investors, but these returns reflect the fact that this is a high-risk strategy.
The main risk considerations for developing are acquisition risk, overcapitalising, marketing risk, finance risk, settlement risk and builder risk
Where to Buy – Drivers of Growth
Establishing a prosperous, sustainable property portfolio isn’t just about your capacity to hold it over time, but is also about the opportunities for sustainable growth over time. Understanding the drivers of growth, and whether they are temporary and unsustainable or permanent and sustainable, will enable you to be more selective with your investments.
Macro and microeconomic drivers influence growth.
Macroeconomics is the study of the current Australian economic market conditions and where they sit in relation to the rest of the world. Broadly in relation the property market, these encompass supply and demand, which are driven by:
- Population growth
- Land availability
- Housing starts
- Mineral explorations
- Infrastructure investment (state and federal) and business investment in infrastructure
Microeconomics relate to events in regional areas and are often used when ‘hot spotting’ areas for sustainable future capital growth or rental increases.
Broadly in relation to increases in the property market, these encompass:
- Population growth and population migration (through the provision of sustainable employment opportunities, especially where salaries are strong so disposable income is often higher)
- Amenities such as the provision of schools and hospitals to support a growing population
- Decreases in the property market can be as a result of:
- Over-supply of property
- Primary industry closing down (e.g. a car manufacturing plant as a primary employer may shut down)
By researching both macro and microeconomic drivers, an investor can gain a better understanding of the likely level of risk attached to property they are considering buying in a particular region or city, from an entry, hold and exit perspective.
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the author’s permission