If you have spent any time looking at residential property advertisements, you probably have been confused about the descriptive language used. Too often, you read things such as ‘close to public transport’, ‘functional’, and ‘popular area’. In reality, these terms can mean ’a 30-minute walk to a bus stop’, ‘has gas, electricity and water connected’ and ‘you can’t afford to live or invest here’.
With no clear rules about how property is described, it’s essential to read between the lines when looking for an investment property.
For example, if you read ‘Hurry, only three left in this fast-selling development’, do you think it might be an opportunity that shouldn’t be missed? But like the choices of fresh fruit in the supermarket at the end of a busy shopping day, the last pieces are what’s left after everything else has been taken.
So an honest ad should say, ‘Don’t even think about buying here because all the good properties have been sold.’ This is because it’s likely that the last three properties are the worst in the block for various reasons, including poor design and a bad outlook. From my experience, it’s very rare that all apartments in a development can be valid investments.
Unfortunately, some salespeople will try to convince you that one of these remaining properties is a great investment, hoping you act quickly and grab one.
As in any situation, it always pays to do your homework and ask questions. For example, if someone recommends a particular apartment to you, telling you ‘it’s a great one’, ask them why it’s so good. If they try to compare the property to the others that are left, ask them to compare it to all the apartments in the development.
When looking for an investment property, other statements to consider include:
- Entry-level bargain
- Hassle-free investment
- Close to university
- Great cash flow.
The ‘bargain’ reminds me of the times I bought cheap things and later regretted it – like buying a car at auction for my son. We drove it four kilometres before it broke down and needed a new engine. I should have known better because the car was very cheap for the year and model.
The same goes for an investment property. If it looks too good to be true, it probably is. If you use real estate website and sort properties from the lowest to highest prices, you will find that the ‘bargains’ are all niche market properties and very few are under contract (meaning no one has made an offer to buy one). Although they are the cheapest properties on the market, they are not selling. The lesson here is that cheap doesn’t mean it’s a worthwhile investment.
The ‘hassle-free investment’ is likely to mean ‘serviced apartment’. In this case, some major banks won’t lend you a single dollar to buy one of these. What does this tell you?
‘Close to university’ often means ‘student accommodation’. It’s probably a tiny apartment being on-sold at a loss. For investment purposes, properties that are appealing to home owners offer the most potential.
‘Great cash flow’ usually means ‘high rent’. The salesperson hasn’t really calculated the cash flow but equates it with rental income. But your taxable income comes into play when calculating cash flow from an investment property — so there’s no way the agent could know what the cash flow will be for you. The full list of the information you need to provide to your accountant to calculate cash flow is available in my book, The Formula or on my website. Calculators on The Formula website will help you calculate property buying costs.
Michael Sloan – April 2017
To speak to a Property Advisor about a property you’ve seen advertised call us on 1300 800 886.