| by Kenneth Chase | 1 comment

Why you should be Nervous Investing in Apartments? Property Advice from Bryce Holdaway

I always find it a really interesting topic
when someone says do apartments make for a good investment or not? My dad is born in
1939 so he’s a pre-Baby Boomer, my mom is born in 1948 so she’s a Baby Boomer, I’m 1975
so Generation X and my wife is 1980 so she’s typically on the cusp of Generation Y. So
over the dinner table, we actually have a really interesting conversation about apartments
because if you think about my dad’s generation, his idea of the Great Australian Dream is
a quarter acre block with a detached house surrounded by a garden with the hill hoist
and a barbeque. But if you look at Generation Y, they’ve grown up watching How I Met Your
Mother, Seinfeld, all these apartment shows typically in New York where apartments are
considered really really normal. For Gen Y and affordability, they find apartments totally
ok as not only a place to invest but a place to live as well. So who’s actually right? I guess no one is really right other than
you need to understand what makes for a great apartment versus what makes for a mediocre
apartment. In my view, it comes down to the argument of should I buy a new apartment or
should I buy one that is existing and established and has been around for a while. I prefer
to buy the established one typically something that was built in the 70s and maybe even to
the 50s and they are a bit older. They look a bit more tired but they are in better position
and they are located surrounded by beautiful period homes on perhaps either side of them
and they are walking distance to lifestyle amenities which make them a really great lifestyle
option. But not necessarily has the sizzle of buying something new. Versus the new which
has all the glossy brochures and the developer puts in a lot of effort into attracting attention,
maybe they put a pool in, they’ve got a caretaker, a lift perhaps a gym. These facilities all
sound really great but at the end of the day, you as a property investor, you are never
going to use those facilities. It’s going to be up to your tenant. And in my experience,
if the size of the block is too large and it doesn’t feel very intimate, a lot of those
tenants don’t use those facilities anyway. So as a property investor, you are paying
for the upkeep of them through your body corporate fees but quite often, they are a bit of a
ghost town in some of these areas. I guess my view is very simple, I would prefer to
have a larger percentage of the purchase price going towards the land value than towards
the building. I can get that when I buy established cause I might be buying one of eight or one
of twelve. If I’m spending $500,000 on that, a large percentage of that $500,000 is going
towards the land value that I’m buying. Now I acknowledge that I can’t point out and say
that that bit of land is mine but I do know that one eighth or one twelfth is actually
mine. Versus if I buy one of 200 or one of 300 again for $500,000, a much smaller percentage
of the purchase price is actually going towards the land value and a much larger percentage
is going towards the building. That’s the kind of the ratio that I’m looking to avoid
and one of the reason why I prefer established over new. The other reason why I like establish
is because I can actually back test and see what was sold previously and get an idea of
the performance of the asset. If I were buying something brand new, typically there is no
history what so ever in relation to the investment so you are doing a bit of crystal ball gazing.
So my view is when face with new vs established, generally speaking, I prefer buying established
property. The second thing is, quite often I prefer
to be on the side street versus a main road cause I’ve actually done some analysis and
look at a whole bunch of performance and it’s really interesting. Most of the time, high
90%, the side street performs better than the busy road. That kind of make sense cause
people pays more emotional value on being more private and off the side street than
they do on a busy road. And that’s important because new is often on the busy road where
else established which is built 40 – 60 years ago, they already have a good position, in
great location surrounded by beautiful houses which can help drive the price. So I would
prefer the side street versus the busy road. I guess the other thing to think about is
size vs shine. By that I mean, some of the older apartments, because the developer wasn’t
under so much pressure to get the financial outcome out of it, they make the internal
size a bit bigger, the living room just a bit bigger, the bedroom sometimes just a bit
bigger versus the newer ones because they need the economics to work to get the bank
to lend them the money. Quite often, they just shrink the sizes until they find that
sweet spot where they can actually make a profit. But the brand new one looks shiny.
New taps, new carpets and everyone get a bit excited about that. They often sell it under
depreciation as well. Now, I love depreciation as much as the next person but I rather do
that through a small renovation which can help us get it back. This kind of brings us to my next point of
the ugly duckling versus the beautiful swan. Again, I prefer to buy something that is a
bit older and I can bring my own improvements to so I can create the depreciation that comes
from the cosmetic renovation versus buying something that the developer has done for
me that I have to pay additional amount to get and not being at the side street such
as an established property. I guess the argument is are all apartments
a great investments and I would say probably not. I think there are only a small percentage
of apartment that actually do make for a great investment. But in terms of deciding which
one you would like to choose, think through the eyes of the person who is most important
to you as an investor. SO if you are a buy and hold strategy, the most important person
is the valuer and if you are a buy and sell strategy, the most important person is the
next buyer or hopefully the next owner occupier. If you walk through the property as you are
viewing it before you buy, look through the eyes of either one of those two individuals
and think about whether they would see owner occupier appeal, whether they would see it
off a busy road, whether they see some privacy and intimacy that comes from being one of
12 rather than one of 200 – 300. If they would place a huge value on that, chances are that
would make for a great investment property and chances are, it will help you in the filtering
process as to which apartment you should actually buy. My conclusion is simple. Not all apartments
make for a great investment. I think you need to exercise a lot of caution when deciding
which one is for you. But if you think about the fact that they need to have some owner
occupier appeal, they need to be investment grade and have some form of scarcity, using
those 3 filters alone will help you make a better decision when it comes the time to
deciding whether or not an apartment makes for a great investment for you.

1 Comment

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Aug 8, 2018, 1:46 pm Reply

Very good point.

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