Blogger: Simon Buckingham, director and property mentor, RESULTS Mentoring
A common complaint I hear from active investors who are trying to buy in a hot market, is that they struggle to find good deals. In fact, many properties seem to go for an outrageous premium.
For instance, in the heated Sydney and Melbourne auction markets right now there are plenty of examples of properties selling at 15 per cent or even 20 per cent over their quoted range!
Why is this a problem?
For a growth investor, buying in such a market means an increased risk of paying too much, only to discover that the market has just peaked.
No property boom lasts forever, and when the market comes off its peak the ensuing fall in prices or flat market can last for a long time. Just ask anyone who bought at the peak in Sydney back in 2003, only to see median prices trend down and sideways for the better part of the following nine years!
The more active investor, who wants to take on a project like a renovation or development to add value, also finds a hot market challenging. Fighting it out with homebuyers and growth investors who just want to own a house in the suburb, and who are less concerned about the condition, 'potential', or profitability of the property, can mean the renovator or developer has to pay a premium for their 'raw' property.
This might be fine if there's evidence that renovated house prices and new dwelling prices have actually gone up by a similar percentage as established houses, but often the margin between old and renovated, or between old and new, gets squeezed in a hot market.
The 'price ceiling' on renovated and new houses in an area won't necessarily move up just because prices for established homes have gone up. And even if the values of new and improved properties do move up, there's often a lag of several months before evidence of this appears in terms of actual sales.
This is of course a big problem if you're trying to make a buying decision today based on current values.
But don't be tempted to speculate on a higher price than is currently in evidence. Any renovator or developer who assumes the value of their finished 'product' will be higher in 12 months, and bases their assumption of profitability on this, is taking one heck of a risk.
Put it this way: If the only way your renovation or property development would make an acceptable profit is if the price for the finished dwelling goes up during the timeframe of the project, then you're gambling on market-driven growth to create your profit - not on the value-add of the project itself.
And if you're counting on market-driven growth for your profit, why on earth would you take on all the added risk of a renovation or a development, rather than just buying an established house to hold for the growth?
So what should we do... Sit on our hands and do nothing until the market cools down? Take a punt and pay a premium, hoping that we're not buying at the peak and paying too much?
In fact, the answer is surprisingly simple - It just requires a bit of lateral thinking...
The solution to investing in a 'hot' suburb is… DON'T!
If the market in your area is already booming, then simply don't buy there!
Those who buy in an area that is already booming have failed to recognise a basic truth: When the market's already running hot, most of the growth may have already occurred, the best opportunities have probably already been picked over by other buyers... and chances are you'll be paying too much.
This is why I'd never rely on an article about a 'hotspot' in a magazine that's already three months old by the time it arrives on the shelves. Nor on reports that identify a 'boom' suburb based on historical price rises (i.e. what has already happened over the last several months).
These kinds of reports just highlight suburbs where property prices have already risen and the market is already running hot. They're too late to be really useful.
But this DOESN'T mean that you stop investing, just because your local market is overheated.
The deceptively simple solution is:
1. Stop trying to buy in the 'hot' suburb, and
2. Instead find an area that hasn't moved yet but that shows evidence of being about to go up in value.
And yes, this might mean having to look further away from home. But would you rather make money, or pay too much for a poor return just to stay close to home?
Procrastination is your ENEMY!
I meet investors all around the country, and there's a certain type of investor I frequently encounter that I'd call "The Procrastinator".
The Procrastinator is an investor who lives in the past (always talking about how the property market used to be), and who constantly comes up with excuses for not taking the next step with their investing.
When the property market in their area is running hot and prices are going up fast, they complain that property has become too expensive, or that they've already missed out on the best gains. They claim they'll wait for prices to cool off and fall back to more "affordable" levels before they take the plunge. And so they do... nothing!
But when prices are falling in their area, The Procrastinator worries that it's a bad time to invest, and claim that they'll wait until prices turn back up before investing. And so, again, they do... nothing!
Even when prices have levelled out, The Procrastinator worries that they're too late and have missed out on the growth wave, or that any emerging new growth might be short lived... so they'll just wait and see if the growth really takes off again, and then - surely then - they'll actually commit to an investment. And once again, they do nothing.
Do you think The Procrastinator ever invests?
Smart property investors recognise that the property market in any area is always changing.
Rather than sit around waiting and hoping that the local market will 'go back to how it was before', or somehow change to fit our needs, we need to be prepared to change our approach to better fit the local market conditions - or to change our choice of local market entirely.
Either way, it's the investor who must change, not the market!
Don't be The Procrastinator. If you recognise something of The Procrastinator in your own behaviour, then make a conscious decision to exorcise that part of your psyche!
The best cure for Procrastination is to get educated on how to read and adapt to the market.
If you're looking for help in understanding the market, how to spot the next boom suburbs before they happen, and some great new ideas on ways to invest profitably no matter what the local market is doing, then get along to Results Mentoring’s acclaimed 'Crack the Property Code' workshop in May for a real shot in the arm.
I hope to see you there!
P.S. Due to venue constraints, there are only limited seats available at the Workshops. Don’t miss out - BOOK YOUR FREE SEATS NOW.
About Simon Buckingham
A highly experienced investor, Simon has purchased more than 50 properties in the last seven years alone, using a broad range of strategies including positively-geared residential rentals, vendor finance deals, renovations, developments and commercial properties, both within Australia and overseas.
As a director and property mentor at ResultsMentoring.com - the home of Australia's best independent property mentoring program - Simon now spends his time investing, developing property, and building businesses - while teaching others how they can do the same.
He has personally coached over 700 investors in techniques that can be used to profit from property in any market, and has presented to thousands of people at property conferences and seminars around Australia and New Zealand. Simon co-authored the critically acclaimed Australian property book The Real Deal: Property Invest Your Way to Financial Freedom published in 2010 by Wright Books, and regularly contributes to articles in Smart Property Investment and other media.