Does Your Investment Property Have An Upside Growth Potential?
There are four things that b Invested founder Nathan Birch has always looked at when assessing potential property investments. Before he buys, he wants to know if he can get it for below market value; if there is an upside for capital growth; whether the property will return a strong cashflow; and buying below rebuild cost. When we talk about deciphering whether there’s upside for growth, lots of people make a simple mistake.
Past growth doesn’t always equal future growth
Nathan has conducted many thousands of MAP sessions in his capacity as a buyer’s agent over the years and one thing he has noticed repeatedly is that people often want to invest in a market that has already had growth.
Say the medians have increased by 10% each year for the last few years and the investor thinks that’s a sign of consistency; that the same level of growth will continue for the next few years.
And it might, but the cyclical nature of property makes it anything but a sure thing. In fact, Nathan says he is wary of markets that have already experienced growth, because there is a chance that the upside has already been realised and when you buy at the top of the market, you expose yourself to the risk of a correction.
So when Nathan looks at properties, it’s less about existing growth and more about picking the growth that is yet to come.
Sydney is a classic example
A lot of people think Sydney’s property market has just been out of reach forever. But those people don’t remember a time (not all that long ago actually), where Sydney was stagnant for a long period.
Between 1999 and 2002, Sydney had a growth cycle, but between 2003 and 2013, the market basically went nowhere. In fact, it went backwards between 2003 and 2007 when the GFC landed. Once that happened, stimulus was distributed, interest rates came down and, suddenly, prices started growing again.
But if you had invested in Sydney between 2004 and 2012, you would have been rewarded in a big way between 2013 and 2018, and then again from 2020 to this year. But if you had judged the Sydney market on its performance over the years preceding 2013, you would not have made that investment. Again it comes back to identifying the chance for upside before it happens.
The next deals are out there
Nathan is always on the lookout for where the potential for the next growth cycle can be found. There are still areas in capital cities where properties can be purchased for $200,000 with a rental return of $300 a week. This property is still affordable.
If you’re paying interest of 3% on those properties, that’s $6000 a year, or $120 a week. That’s affordable. If you’re renting it out for $300 a week, that’s good profit every week.
So, yes the deals are out there, it’s just a matter of knowing where to look, or engaging someone who does to be on your team.
To watch the full podcast episode on ‘Properties Primed For Growth, Regional Preferences & Community Questions’.