Investment mistakes to avoid.
I have decided to do a spread on investment mistakes to avoid, focusing on 1 mistake each week over the next 5 weeks.
Buying properties because they are cheap.
There is a huge difference between buying at a discount and buying a cheap property. There are many reasons why a property may be cheap and it is your job as an investor to discover the reason. The definition of cheap in these examples is a lower price than the majority of the surrounding or similar properties. Sometimes a property may be cheap because the owner really needs to sell due to their own reasons. This is ultimately what you are looking for.
Other reasons a property may be selling cheap is issues with the property itself such as weather tightness issues or no CCC, neighbour or tenant problems – often an investor will sell the house rather than having to deal with the tenants, industry closing down -I.e. In a mining town if the mine closes down, property prices will drop dramatically as they did in Ravensthorpe in 2009, infrastructure -is the council building a motorway through the living room? Sometimes there will be something wrong with the actual land itself- there was a case in Ballarat (Vic) where the land couldn’t be built on because there was a mine underneath it and the land was considered unstable. This shows the importance of doing thorough due diligence on all aspects when purchasing property. Always ask why the vendor is selling. In New Zealand the agent is obliged to tell you any problems with the property THAT THEY ARE AWARE OF. The agent is also obliged to look into any issues they believe may be associated with the property – however this may be as simple as asking the vendor about the issue.
The next reason a property may be cheap is because it is on lease hold land. Leasehold means that you own the building however you pay “ground rent” for the use of the land. You often see this in areas around St Johns, Kohimarama and One Tree Hill. Leases are for a set period of time and are reviewed at the end. Usually the rent is approximately 7% of the land value paid annually. You will often find that properties are sold cheaply towards the end of the lease. The reason for this is because of the upcoming rent review. To give you an exaggerated example: It is quite common to have a 21 year lease, therefore if your lease was reviewed in 1992 with a land value of $80,000 the lease would be $5600 per annum. However with the lease being reviewed in 2013 and the new land value at $350,000 the new rent would be $24,500 per annum. Naturally vendors are quite keen to get out of their properties before it kicks in. There was a case like this very recently with an apartment complex in the Auckland CBD.
The next reason a property may be cheap is because it caters to a limited market. How many people in Clendon Park are going to be looking for serviced apartments? Not too many. Therefore if you have a limited market there is not going to be too much competition pushing up the price. Although it may be considered cheap you are probably only paying market value.
One bedroom and studio apartments and units are another thing investors often get tripped up on. When you think about it the only reason people buy or rent a 1 bedroom apartment is because it is cheap. Therefore when it comes to selling or renting the only people looking for a 1 bedroom apartment is someone looking for something cheap.
Another reason why a property might be being sold for cheap is because of the properties disrepair. Although it may be cheap compared to the properties surrounding it, it is still at market value. However in this case, there is an opportunity to take advantage of the properties disrepair, by purchasing it at a value below those of the surrounding area; you are able to renovate the property to bring it up to a comparable market value, securing yourself a tidy little profit along the way.
So when you are hunting for properties make sure you determine the real reason that property is being offered so cheaply and do your due diligence thoroughly. If it is indeed a bargain, then snap it up quickly.