There is a school of thought that property is a long-term investment. There are others who believe that timing is the key element to either investing or divesting of real estate. While there is some truth to both these propositions, this article will demonstrate that one could invest in any market, but with the qualification that the property should ‘actively’ be managed to realise its true potential. More importantly one should fully come to terms with their investment decision making process and not simply invest or divest because it is the trend. In other words, become a leader in terms of what you wish to achieve, not be a laggard that follows what others are undertaking.
In 2015, everyone in Sydney was buying residential property. It was common knowledge that if one was missing out if one waited. House prices prospered and loans flowed and many people generally made money. However, there was a blip between 2016 and 2018, where prices came back, but after July 2019 it blossomed again until literally two weeks ago when the music stopped. Government measures to halt the Covid-19 virus has had a profound effect in halting the virus spread, but it stopped the economy and indirectly property in its tracks.
Now in April 2020, the economic malaise is starting to impact and some people are anxiously looking for help from their lending institutions or ordering real estate agents to sell their homes. With so many people out of work, ‘mortgage in possession sales’ are starting to occur in the market place and the great real estate boom of 2015 and late 2019 looks more like a ‘flicker of the candle’ and many believe the downturn has hit the accelerator pedal.
In order to fully understand the Covid-19 impact, the following example should give the reader an idea how the market has ground to a halt. In Rose Bay a suburb of Sydney, a home in Farraday Avenue sold in early March ’20 for nearly $7 million, well above the reserve price. Exactly, three weeks later in the same enclave enquiry level for similar properties have stalled and houses are not selling even at a major discount to their asking price. Supply of property for sale is starting to outpace demand and prices are beginning to fall again.
So, what do you do at this stage of a falling cycle? The question is, is this the right time to buy, or sell; should we be waiting for a further fall, if it does fall more?
Most will state that one should wait, yet with Covid-19 cases ‘flattening’ across the NSW region and a share market resurrection, the bottom of the market may not be that far away and the market may react quickly with people being re-employed coming out of their ‘lockdown environment’ and beginning to spend.
However, adopting a conservative standpoint, when we talk of a ‘soft’ economic market, we are typically referring to effective wage rates remaining static or falling and unemployment growing. With this in mind, it should be obvious to the reader that some people will not be able to afford their repayments and the possibilities of an overall recession occurring is then relatively high.
In the event of a protracted recession the situation plays into every investors dream. However, if one invests too early and the market falls further, one may have missed the opportunity to increase one’s return. However, this where the astute, well researched investor comes into play. While timing plays a part, it is what added value they can extract from the investment that at the end of the day will benefit them. To do this, they need to consider all the facts including several market factors (including supply/demand pipeline and market performance indices), strategies and possibilities.
Sadly, there is a history of ‘buy’ or ‘sell’ laggards waiting for the market to stabilise which will give them the impetus to invest or divest and yet with a rapid correction in the market, they may find they have missed out as they have acted too late.
The important point is understanding why they are actually afraid to buy or sell now and miss out later. There is an important economic term traditional, property advisers give that they believe should become part of one’s investment vocabulary or divestment strategy and it is called ‘opportunity cost’.
Opportunity cost is an economic term that refers to the price you pay to miss out on one option when one commits to another. In this case, buying Property A can be a problem if you miss out on Property B. If Property B ends up being better (one bought it after the market crashed and paid less), the opportunity cost would be the money one lost that one could have made if one had waited for Property B.
This anxiety resulting from the unknown holds a lot of investors or sellers back, hence the laggard mentality. So how does one beat it? We at Blue Quadrant call this from a buyer’s perspective the BRAG approach. Buy, Refurbish, Asset Manage and Gain approach. From the seller’s standpoint the acronym we use is SWIM. Sell, Wait, Invest, Manage. For us while timing is an advantage, our focus is to ensure there is benefit, whether it be return on investment for investors. Please note, while we act for owner occupiers, we still believe every buyer should consider the buy or sell decision as an investment.
Let us touch on the SWIM (Sell) approach first then focus on the BRAG (Buy) approach later in this article. A person will sell if there is an urgent economic need to do so or simply to get out with the intention of maybe buying well later. The latter is usually the approach adopted by astute investors. If one relied on some of the latest press coverage the market in Australia is only now beginning to fall and so the tactic is simply to successfully sell while there are still buyers in the marketplace; then astutely reinvest when the time is ‘right’, or more importantly when a healthy return on investment can be realised. Most importantly, whether one holds the property for a short or long period of time, it is imperative that one actively manages the investment in line with one’s investment decision making.
We at Blue Quadrant advised one of our investor clients to sell their townhouse comprising three bedrooms, two bathrooms on the Upper North Shore in early 2016, given that there was not much value upside that we could extract from the property. Furthermore, the market was peaking and we had a purchaser prepared to pay $1.8 million for it. A year later on our advice our investor bought a four bedroom; two-bathroom house, with pool in the same area and with a higher rental rate for $1.625 million.
Another owner occupier we advise had intimated to us they wished to move from the North Shore to the Eastern Suburbs of Sydney. Interestingly, at the time we had a buyer for their four-bedroom, property who were willing to pay $2.1 million, but timing was an issue as they had a daughter in her final year of school. Their main aim was to ‘downsize’ and relocate to the Eastern Suburbs and buy something cheaper so that they could place money away as they were close to retirement.
If they had sold then in the height of the market, they would have had to pay the equivalent of $1.85 to $1.9 million in the Eastern Suburbs for a comfortable, renovated semi-detached home or $1.65 million for a 2/3 bedroom ground floor apartment. In essence if they transacted then they would have been able to place approximately $200,000 in the bank.
In 2018 they appointed an agent to sell their home, but with no positioning strategy the house failed to sell for 16 months in a flat market and the best offer made was less than $1.8 million. Realising they needed astute advice, they approached Blue Quadrant and were told that the reason the house did not sell was because there was no front door. One had to walk to the rear of the property to gain entry via the kitchen. At a cost of $3,500 a front door was introduced and some minor repairs to an internal beam undertaken. We at Blue Quadrant appointed and supervised an agent who then launched the property when supply had dramatically fallen and in a depressed market sold the property for $1.905 million. While this was a $200,000 drop on the previous offer made, we were able to acquire a semi in Randwick for a low $1.4 million and with $100,000 in renovation costs provide these purchasers with an asset which in today’s market would be valued in the vicinity of $1.925 million. The net effective gain as a result of our involvement in a down market has been $400,000.
This shows the impact of what can be achieved even if the market is down. By taking a lead position in what can only be described as a poor market, the purchasers came out on top. Proactive advice by Blue Quadrant personnel ensured that selling low could be countered by buying well and improving the asset and as result a positive outcome was realised.
From a buy perspective, the approach is fairly straight forward. There is some risk in the short-term, but if one does their homework the value will increment over time. The caveat to this is that one buys, courtesy of them knowing what they are doing or being assisted by a capable and professional buy agent or consultant.
This often ends up resulting in a hefty growth in capital value or the production of a cash-flowing property. Let us once again consider an investor of ours who acquired a property in St. Ives below the market price. The owners wanted $1.45 million and we secured the home on their behalf for $1.22 million. Surprisingly, the market was buoyant, but the property did not present well, both in terms of layout and size with only three bedrooms and a bathroom did not appeal to the market who were looking for a minimum four-bedroom, two-bathroom home. Our team came up with a clever solution, which transformed the entrance hall into an ensuite for the adjacent main bedroom and turned the large laundry into the open planned kitchen and as a result the original kitchen became an additional bedroom. One of the linen cupboards became the new laundry equipped with a small basin, part cupboard and enough room for a washing machine and dryer. The total cost for the refurbishment was $97,000.
The Asset Management approach adopted courtesy of our research and feasibility study reviewed both economic and demographic data and it’s bearing on the property market. The strategy adopted was to rent out the home for a year at premium and then dispose of it. The house was sold for $1.7 million with a gain of $380,000 taking into account other holding costs. The original deposit was 20% or $244,000, which shows a return on equity of over 100%.
In this particular case, we put paid to the theory that property investment should be for a long period of time. If an investor had bought the home across the road at say $1.22 million in a market in which long-term capital value growth rate was 5.3%, it would have taken another 7.5 years to achieve the same return.
How is this possible? When you buy a house in a conventional way, one puts down a deposit, then includes money for stamp duty costs and then one waits for the property to gain in value.
It is our firm belief that there are always opportunities in a good or bad market, but what is required is detailed research, strategy and the astute eye for repositioning of the asset to meet market.
Let us look at one more example that further substantiates taking advantage of the opportunity and most importantly not being traditional or passive, whether you are an owner or investor.
An investor we know and have advised, bought a 1960’s three-bedroom apartment in a sorry state in January 2019 for $918,000. It had been rented out for many years and needed an uplift. $52,000 was spent on a new kitchen, bathroom, and carpets and window coverings were replaced. Most importantly, part of the two bedrooms were converted into a study or small third bedroom. At a loan-to-value ratio of 70%, the full commitment was $295,500 (rounded). It was subsequently appraised and refinanced by a new lender at a loan to value ratio of 80% at $1,160,000. The beauty of this is that the investor pulled out $50,000 of his original capital invested and yet still had enough equity in the deal to remain in control. Because the property presented well and the possibility of procuring tenants was easier, they were able to secure a more attractive interest rate and terms. Most importantly, they gained an additional $185 per week or nearly $10,000 more in rental and had gained a refurbished asset which would not require extensive maintenance for a few years and could be sold easily if the need did arise. In a traditional sense if one’s property produces positive cash flows (brings in more income than it costs to own) and capital value is increased and gaining tenants is not an issue, then all is swell.
We at Blue Quadrant fervently believe there are always buyers in good or bad markets. Most importantly is how one realises the ‘highest and best use’ for a property. If the market is about families, then a two-bedroom house or apartment may not suffice. I am a firm believer in the old adage of buying the worst to average house in the best street and uplifting to meet market expectations.
While no one has a crystal ball and can tell where the market will fall or rise, there are some standard processes as demonstrated above that one can use to hedge one’s bet in any market and grow your wealth over time. Our message is simple – do not sit on your hands and wait to buy real estate, buy real estate when the opportunity is staring you in the face! If you need our help, we are always willing to please.