What Processes Does Nathan Go Through When Buying A Property?
For head of Binvested, Nathan Birch, there are many processes involved in buying a property.
Unlike most people, he doesn’t start by looking at realestate.com.au.
Instead, he starts by looking at his portfolio, and figuring out where his next purchase fits into his overall strategy.
Investing on the high side of the street.
If you ask most people, there is a long list of things they look for when buying a property. Whether searching for a home or an investment, most will want to buy a house on a large block of land. This needs to have potential for a granny flat and be in a central locale, near schools, shops and the train station.
It also needs to be in a good neighbourhood, on the high side of the street and in a CBD where prices have been going up for the past few years.
Nathan, on the other hand, has a different perspective.
“I look at property very differently – purely as a vehicle that will get me from where I am to where I want to be,” he says.
“For me, it’s all about numbers and it’s all about the property doing what it needs to do.”
The common buying process lacks strategy.
According to Nathan, most people don’t consider their overall strategy when buying an investment.
“A lot of people don’t put emphasis on their strategy, and they look too much at the deal.”
He says, the average buyer out there simply looks at realestate.com.au before asking their accountant if they should buy the property they are considering.
The average accountant will then tell them they should buy a negatively geared property so they can claim it as a tax concession.
When the buyer approaches their broker, the average broker will tell them to get the biggest property that is negatively geared so they can write them a bigger loan.
Then, when the buyer approaches their average lawyer, the lawyer tries to talk them out of the deal.
A lot of wannabe investors will ask friends and family members who have a couple of properties what they should do.
Nathan says this can often come with limiting results.
“If you repeat what they have done, you’ll get what they have got as a result,” he says.
“It just comes down to what result you’re looking for.”
Location, location, location.
You may think location is super important when it comes to buying an investment property. But, while it is an element worth considering, it may not be quite as important as you think.
Take properties that are close to train stations, for instance. Sure, these properties may be convenient, but train stations can be noisy. They can also attract loiterers and a regular stream of passers-by at all times of the day and night.
As Nathan points out, some of the junkiest properties in Sydney are ones that are close to the station. He also notes, that there are plenty of properties out there that have seen excellent capital growth even though they are nowhere near a train station.
Instead of worrying about proximity to public transport, Nathan looks at how much it would cost to rebuild each property he buys.
If he has spent $200,000 on a property that would cost more to build, then he has basically removed any downside risk from the equation.
While he does avoid buying in certain locations, such as flood zones or areas close to mines and ports, he doesn’t care too much about buying on the high side of the street near the local school.
Buying after growth vs. buying after prices have fallen.
Most people get attracted to markets that have experienced strong growth over the past five years – but Nathan takes the opposite perspective.
“When you buy a property that has been going up for the past five years and has doubled in value – that’s at the peak risk,” he says.
“Most people think it’s great because it has gone up in value, but it can’t go up any higher.”
He says, if a property has gone up so much over the past five years, when it falls, it will fall from a higher point until it reaches a correction.
Nathan prefers markets where prices have dropped for the past few years before reaching their bottom and starting to recover.
“I’m a contrary investor and I buy properties that are in countercyclical markets,” he says.
By doing this, he removes the risk of negative capital and maximises his chance for greater gains throughout the market’s next upward phase.
A word on granny flats.
Granny flats are another popular choice for investors – and another thing that Nathan doesn’t prioritise when buying a property.
He says, why would you spend $100,000 adding a granny flat to a house when it won’t actually add more value? The cost of building it makes the overall property overvalued, and this leaves little room for capital gains.
Instead, Nathan says he would prefer to invest $100,000 into buying another property. With its own heart and lungs, another property that has been purchased below market value and in line with your budget will have much better growth potential than a granny flat.
Comparing the market.
Nathan says, when looking at a deal, he always looks at the elements of the surrounding market.
Infrastructure projects can positively impact an area’s growth, while large scale apartment developments may bring demand down from renters and buyers.
Looking at comparable properties and recent sales is an important process when buying an investment, he says.
“If everything is under contract, that’s a good indication that as soon as there is new stock then that is going to get gobbled up at a premium because there is nothing else there.”
On the upside, if a lot of the properties listed have price reductions on them, this could indicate a falling market – and this is Nathan’s favourite type of market to buy in.
In these circumstances, Nathan tends to play selling agents against one another in order to buy “whatever he wants for whatever price he wants.”
How far will your property purchase take you?
He says, in any case, the property you buy needs to perform. It needs to get you from where you are to where you want to be.
“There’s no point having a car in your garage that looks nice but that you can’t even drive,” he says.
Property is no different. And, before you buy anything, you need to have some serious perspective on your finance needs now and further down the track. If you plan on building a portfolio, your fourth, fifth, sixth and seventh properties are the trickiest to fund. You may need a good injection of equity from day one, as well as a strong cashflow to get you your next loan, and so forth.
He says, he recently purchased a property for a client at $320,000. A few months after settlement, the same property was revalued at $440,000. The client only had $40,000 left after buying it, but this increase in value gave them enough equity to go ahead and purchase three more properties.
What processes does Nathan go through when buying a property?
It’s time to forget about what the average person does when looking for an investment property. If you are serious about creating wealth through investing, it is important to take a business-like approach and do some serious research and strategizing.
Nathan says he goes through the following processes when buying an investment property for himself or for a client.
- Looks at portfolio to determine what type of property he needs to buy next.
- Ask himself if the property he is considering will deliver what he needs it to.
- Looks at comparable properties to see what has recently sold and whether properties are selling quickly or are stagnating on the market.
- Does a cashflow analysis on the property in question to see if it will hurt him or help him.
- Figures out if the property will bring in growth or equity immediately.
- Figures out how it will help further property purchases down the line.
- Sees what the bank will value the property at.
- Looks at how high the property’s value could potentially go up in the future, in line with the average income earned in the region. If the property is already worth more than $1 million, it is less likely to double in value based on a demographic of average income earners.
- Assesses the impact of infrastructure projects and planned developments on the property’s value.