12 Apr Get your feet on the ground and see the area you plan to invest in
You can’t beat getting your feet on the ground and seeing the area you plan to invest in. The temptation is high, because of the internet, to believe that you can assess a good property without travelling to see it. But travelling there is not always possible. Micheal Yardney this week speaks about what he calls a ‘learning tax’ that may apply if you believe you can invest from a distance.
Kevin: Wow, haven’t we seen a spectacular growth in the Sydney market? I guess to a lesser extent Melbourne, as well, and Brisbane is now on the horizon of people tipping that that’s going to have a fairly good 2016‑2017. The temptation is great if you don’t live in those cap cities to actually invest there, to make sure you’re on that bandwagon, as well.
Michael Yardney joins because I’m curious to know where can you go wrong with investing interstate? What should we be aware of before we jump in, boots and all?
Michael: Thanks Kevin, I agree with you that a lot of people are tempted to invest interstate, and I think they should – not as much to time the market, but maybe to give themselves a bit of diversification in the property portfolios.
But Kevin, there’s a whole range of other people who just are too scared not investing in their own back yard. They want to see their properties, they want to feel their properties, they want to drive past it, and that’s one of the first mistakes: actually not investing interstate and only investing in your home town if it’s not the right place to invest in.
Kevin: Yes. It’s really a double-edged sword here, isn’t it? You shouldn’t not invest in your own back yard, but that shouldn’t be the only investment strategy you have.
Michael: Exactly. Open your horizons and your opportunities elsewhere. But then as you said, that opens up a whole potential bag of worms. There are some traps people have fallen into by investing interstate. One of the big ones is they buy off the plan.
Too many of the new off-the-plan properties, particularly in the Melbourne and Sidney CBD are being marketed to interstate investors, and while they look really pretty in the ads and the brochures and the models, there is no scarcity value in these properties. There is no supply pressure to underpin property price growth, and these properties in general are dominated by property investors who are often speculating rather than owner-occupiers who are going to underpin the demand.
One of the other big mistakes is buying off the plan and then usually end up paying a premium for it anyway.
Kevin: I call it low-hanging fruit, because that’s the easy thing to do if you’re going to buy interstate, to buy off the Internet. You’ll always be drawn into those off-the-plan type schemes.
Michael: That’s right. Another one is buying new house and land packages in those master planned communities, those new estates. They may look like they have all the bells and whistles, people consider they have a reasonable land component, but again, the problem is in these outer suburban areas there’s a minimum amount of scarcity because there’s another new estate, there are other new homes around the corner, and the demographics of those areas tend to be young families who are price- and interest-rate-sensitive, so this also is going to minimize your rental growth and capital growth.
Kevin: One of the other problems I see, Michael, is this temptation to buy sight unseen. It’s very easy now with so much information on the Internet to think you won’t even have to travel there. Do you hold that theory?
Michael: Kevin, I agree with you, you should never buy sight unseen. There was a bit of publicity recently in the papers and on TV about a house being sold in Sydney that had a huge water tank behind it – three or four stories high – but because of the angle of the photos – they didn’t Photoshop them, but because of the angles of the photos taken – you just couldn’t see it.
I’ve heard horror stories of people who bought sight unseen, thinking their investment probably had incredible views – it did, but maybe only from the laundry – or who didn’t realize there were large power lines that dominated the streetscape because they relied on the agent’s photos.
The moral of the story is don’t risk purchasing sight unseen unless you’ve got a trusted representative such as a local – not an interstate – buyer’s agent or somebody on your side reviewing the property on your behalf. You don’t have to see it as long as one of your team sees it.
Kevin: That raises an interesting point, if I could ask you about that. You mentioned there are buyer’s agents. You said not an out of town buyer’s agent or somebody who flies in, has a look around, does your homework for you, but you’re talking about someone who lives in the area and knows the area.
Michael: Of course, I have a bias towards it, because my team are buyer’s agents, but there are lots of great professionals in every state doing this, so my recommendation would be to use a local professional who knows the market, who knows why one side of a street is better than the other, which properties are in school zones.
One of the problems I’m seeing currently is people are flying in and flying out. They don’t have the perspective, they don’t have the depth of experience that one needs to understand what makes a great investment property in a particular location and what doesn’t.
Kevin: On that point, I guess you have to be careful when you’re dealing with these experts that you’re not dealing with marketers. How can you tell that you’re falling into that trap?
Michael: I’m not suggesting that all property marketers are trying to scam you. There are a fair few rogue operators out there who add a significant premium to the property’s sell price to account for their commission.
I guess it’s important to know if you are dealing with somebody interstate, who are they working for? Are they being paid a fee by the person that they’re representing, the seller, the vendor, the developer, or by you? The only person who is likely to make a decent profit out of that transaction, though, isn’t the investor.
I’d be paying your faith in somebody to represent you if you’re buying interstate, otherwise you’re going to pay a huge fee in a different way. I call it a learning fee. I call it a stupid tax by making the mistake some investors make buying interstate.
Kevin: I suppose you could always tell if you go to someone who may be a marketer and they have already some stock that they want to sell you as opposed to finding out what is actually going to fit your portfolio.
Michael: Definitely. If you’re going to get somebody to help you, to be on your side, what they have to do is work out where you are, where you want to head, what your risk profile is, what your timeframes are. They can’t just open a drawer and pull out a brochure with something that they have on their list to sell. You want somebody on your side who is independent.
Every state has got a swag of good, professional buyer’s agents who can represent you. It comes at a cost in some people’s mind, but in my mind it’s actually an investment, a form of piece of mind that stops you paying that learning fee.
Kevin: Always good talking to you, Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure, Kevin.