What to look for in an investment property – Patrick Bright

What to look for in an investment property – Patrick Bright

 

We answer a question from Courtney and James who need help with the purchase of a property in a highly sought after area but it needs considerable work – work that they cannot afford to do just now. Their question, that we put to Patrick Bright, is “what to look for in an investment property”.

 

Transcript:

Kevin:  In just a moment, we’re going to answer a question in the show that came in from Courtney and James. It was a very interesting e-mail, which prompted a number of other questions that were mulling around in my mind. I want to dig into a few of those first before I read your e-mail, Courtney and James. My guest is Patrick Bright from EPS Property Search.

Good day, Patrick. How are you doing?

Patrick:  Very good, Kevin. Nice to speak with you.

Kevin:   That’s good, mate. I have sent you the e-mail from Courtney and James, and we’ll address that in just a moment because it talks about buying an investment property or buying a personal property. I wanted to ask you – because it’s question I’m asked a lot, and I’m sure you would be, too – what makes a good investment property? What do you look for?

Patrick:  There are a number of things to look for when you’re looking for an investment property. You want to look at property that’s going to be easily rentable. It’s going to actually be good for its purpose. Not all property is what we would call investment grade or investment-type property to live in; a lot of stuff is more owner-occupied. So that’s important to get that right.

Kevin:  That actually raises a very interesting point, because one of the questions I wanted to ask you is if, as an investor, I think I’d like to live in it, does that necessarily make it a good investment property?

Patrick:  It doesn’t necessarily make it a good investment property, no. It can be. If you’re the sort of person the target market is going to be renting to, then yes, but if you’re a family and you’re buying an investment property that’s – let’s say – an apartment, then it doesn’t matter what you think; it matters more what type of tenant is in that area. What’s the demand like? You have to work out what type of tenant is looking for property to rent and what do they want? Then buy that.

Kevin:  It makes a lot of sense. I’ve often wondered, too, about buying in the area in which I live, because I know it quite well. I know the area I live in. I feel comfortable with it. Is it always good to buy an investment in the same town or at least the same state you live in?

Patrick:  There’s not a lot of downside to doing that because you’re less likely to get hoodwinked on price. The good thing about buying somewhere you live or locally to where you are, if you can afford that market, if it has good investment fundamentals, that’s not a bad decision to make because you’re not going to get caught out on buying price.

Most people overpay or get it wrong – as in they buy the wrong type of property for the area that’s not really well in demand or pay too much money – when they’re buying out of an area they have no idea about, inter-state or in a completely different part of the state that they’re in. Particularly, people get it really wrong when they try to be really tricky and clever and buy overseas. Those sorts of things add a degree of risk into it the further you’re buying out of your area of influence.

While where you live may not be the best location to buy, if it is, that’s great. If it’s not and you’re going to buy in another state or another part of your state, then really get some expert advice that’s local on the ground, or get to know that area as well as you know where you live before you make a buying decision to avoid overpaying or buying the wrong type of property.

Kevin:  A lot of it comes down to getting a good rental return or getting a property that’s going to rent quite well. How would an investor go about finding out if a property is going to be a good renter and in a good area?

Patrick:  If you’ve picked an area, that’s a part of the equation. Let’s say that you’ve decided on a location, for instance. “What type of property? Do I buy a house? Do I buy an apartment? Do I buy a semi? Do I buy a terrace? What do I buy in the area? It’s a good idea to talk to property managers in the area and ask them what’s always in demand. What can they just never get enough of? I find that’s a really good question you could ask to somebody in an area you’re not sure about.

If they say, “We can never get enough apartments,” great; that’s interesting. Is that one-bedroom, two-bedrooms, or three-bedroom apartments? You need to narrow it down a bit further.

Then you also need to think about demographics and where the market’s shifting, because buying an investment property shouldn’t be a five-year decision; it’s a ten-plus-year decision, preferably indefinitely if you buy well. Then you can leverage off it and benefit from it for decades to come, and you can leave it on to the kids, if you choose.

It’s very important to get it right. Do the research upfront and get help. Probably the best thing I could suggest is to get some professional advice. Remember, if you’re not paying somebody for their advice and their opinion, they’re not acting in your best interests, so you need to get someone who you retain to represent you and your interests.

Kevin:  That’s really good advice. I love that piece of information about going to a rental manager, too, because they’re the people on the ground. They know what’s in demand.

There are two things with property. One is the return, and the other one is the capital growth. When it comes to an investment property, is it all about the rental return?

Patrick:  No, it’s not, but it’s part of the equation. Rental return is important and it’s part of the calculation, however I don’t believe you should buy a property based on the rental return alone; I think that would be a mistake. It’s the same to buy a property based solely on the potential for capital growth, not taking into consideration the rental return, either. You need to have both of those parts come into the calculation and the equation. You have to be careful about that and weigh that up.

There’s always the debate amongst circles of “Do I buy positively geared or negatively geared?” Most people are in one of two camps, and they will defend those positions quite strongly. My view is that I look at property as a business investment. I treat it like a business.

When you start a business from brand new, from scratch, you’re often putting in money and putting in time, which is essentially money. You’re not making a lot of money. You’ll generally make a loss in the early stages because you know that you’re going to build something and it’s going to have a value later. I look at property a bit like that.

Typically when you’re buying a good, strong capital growth property, it tends to have what we call the negatively geared part to it. Now. all property can be positively geared, and I’m not against buying a property that pays for itself from day one, but we know that those properties typically don’t lie in high, strong, long-term capital growth locations.

You need to weigh it up. If you can’t afford to buy a property that doesn’t look after itself from day one, then maybe doing that is better than nothing. If you can afford to buy a property that may not look after itself from day one, then maybe you can look at doing that. You have to have a future, but it has to get to a point where it’s going to be paying for itself. All properties can be positively geared if you have enough equity, so it’s generally just about having a bigger deposit. That’s part of the conversation.

Kevin:  That’s right. I’ll get to that e-mail now from Courtney and James, if I could, thanks, Patrick.

Courtney and James both write: “Kevin, we’re looking at an investment property on the southern end of the Gold Coast.” Palm Beach is what they’ve said. “It’s quite literally the worst house on a lovely street. We can afford to buy the property as it is, but we can’t afford to do the renovations at the moment, despite it needing both the kitchen and the bathrooms done. It’s currently rented with long-term tenants with a decent rental return. Is it silly to buy a property that we know we’ll need to spend some money on, even though we can’t afford to do the work right at this very moment?”

What’s your reaction to that?

Patrick:  It’s a good question, and it’s one I’ve had thrown at me before. First of all, I’ll say that I don’t know the area very well or that part of the state, so I’m not going to comment on whether the area is good or not. Is it fine to do that? Yes, it could be fine to do that. In fact, I do it all the time. Provided that Courtney and James do the calculations to ensure they’re not going to overcapitalize, it could work out really well for them.

Manufacturing capital value is something I’ve been doing for property renovations for over 15 years, for myself and clients. In my view, it really is one of the fastest ways to get ahead because you’re creating something out of thin air – if you like – equity, which you’d need to leverage off to buy more. That’s an important thing to do. I’m a fan of it.

A bit of a shameless plug: I’ve written a book on renovations, on doing that. It has ten case studies in it and over 50 tips on how to do that because I’ve been doing it for that long. In my background, I’m actually a carpenter, so I have the experience and time. I’ve done all of that many, many times, so I know the pitfalls and the ways to make money out of it.

Kevin:  What’s the book called? Where can we get it, Patrick?

Patrick:  It’s called The Insider’s Guide to Renovating for Profit. You can get it either off our website – probably the easiest place; we don’t charge for postage – or you can chase it down at a bookshop.

Kevin:  The website address?

Patrick:  It’s EPSPropertySearch.com.au.

Kevin:  Good stuff. Just before I let you go, just an extension to that: is it a good idea to buy an investment property that you plan to use as a holiday home a little bit further down the track?

Patrick:  Ah, that one, yes. That’s another question.

Kevin:  It’s two different things, isn’t it?

Patrick:  Yes, it is. I’ve asked this a lot, and I’ve looked at it. While it can work out, and there are examples of people where it has worked out for them – I have seen the odd example – it very seldom does. I think it’s a bit of luck meets opportunity where those things work out. I would call that a speculative approach to investing, rather than having an investing approach. It’s more of a risk. It’s not tried and tested. It’s not solid.

There’s no problem with doing that if you have several investment properties or you’re in a good financial position and you decide “I want to do this and it may or may not pay off.” If you can wear that, go for it, but if you’re starting out and you’re trying to get ahead, I wouldn’t be taking that kind of speculative risk.

Kevin:  Unfortunately, it’s what happens when a lot of people go to a holiday location somewhere, either around the world or in Australia. They really enjoy their holiday, and they think, “We’d actually like to buy an investment here, come back, and use it as a holiday home.” It can be a big mistake.

Patrick:  It generally doesn’t work out. I’ve been in real estate nearly 20 years now, and I’ve come across a handful of people that’s worked out for, where they’ve said that’s been a good thing, and it hasn’t really come out hugely in front. They haven’t done any better than just buying a good quality investment property and renting it out permanently. The fact that they didn’t lose money on that type of approach is considered a very good outcome.

Kevin:  Mate, great talking to you. Thank you very much. I’ll remind you of that website again. It is EPSPropertySearch.com.au. Patrick Bright has been my guest. That book of his is waiting for you there now. Go and check it out for yourself.

Patrick, always great talking to you, mate. Thanks for your time.

Patrick:  A pleasure, Kevin.

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Kevin Turner
kevin@realestatetalk.com.au
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