Some experts advise investors buy under median value, so there’ll be more properties “dragging up” your property’s value. But it doesn’t matter what the median for the suburb is, valuers will compare a property to: nearby properties; that have similar features; that sold recently.
It is impossible for the median to “drag” values up.
It’s bad advice because investors could see a property below the median and start thinking its good value for money, when it could be the complete opposite.
I think the advice comes from the fact that below median value homes normally have better risk adjusted returns. They don’t surge when the market goes up like prestige properties but don’t go down as much when the market declines. There are generally always tenants for under median properties because when things go bust people will rent lower priced accommodation so you get people trickling down which isn’t the case when you have higher priced properties.
Yes, good point about the relative risk associated with price point. Core Logic have published a fair bit of data along those lines. Like this chart…
Although it’s deciles within a city, there’s no reason to believe the same concept doesn’t apply to properties within a suburb.
But I dunno about rent. If the market goes pear-shaped, landlords lower their rents across the board to whatever the market demands. If expensive property asking rents are lowered to avoid extended vacancy, they might come down towards the same rents as cheaper properties. But then landlords of cheaper properties would also have to lower their expectations. It trickles down. So, cheap and expensive come down together to meet the lower demand.
Anyway, there’s certainly no “dragging up” effect by aiming to buy under the median for the suburb. But valid point about the risk, especially for the short-term.
I think the idea of buying under value is to be able to add your own values. As the likes of Steve McKnight and many investors on this forum would point out “don’t buy a solution, but instead implement your own solution and then sell your solution”.
Where you make money is not when everything is done for you, but instead for yourself to overcome difficulties yourself and sell the final product to the others.
My real life case.
I bought a 3 bedroom house in Traralgon not too long ago for low 200K (with existing tenant), it is structurally sound with good bones but very very under renovated. Only in the past 2-3 weeks, the next door house across the road, being averagely renovated (3 bed house with similar land size and configuration) is listing for low 300K, while the other one also practically next door to mime (well renovated, also 3 bed house with similar land size and configuration) was sold for high 300K.
My tenant has recently vacated and my builder has quoted some 40-50K to renovate to the same quality and standard as the high 300K property. (can probably do it for cheaper if I do it myself, but I am not a professional builder and rather than spending more time than usual and risking not doing it properly, I choose to let a builder to do it for me…)
If I renovate and keep it, then I am looking at an increase of 30% rental.(approx increase of 80-100 per week based on current figure)
If I renovate and sell, then I am looking at selling for approx 70-80K profit (before tax, before agent commission).
So the idea for buying under value is never to “drag up the value”, but instead to “implement my own solution”
This reply was modified 2 years, 9 months ago by Steven.
This topic is about buying under the median. You can buy under the median and still pay too much. Conversely, you can buy over the median and nab a bargain.
But a nice case study. Assuming you pay an agent $7k to sell it and your base profit was $75k, then prior to tax you’ve made $68k.
Assuming you’ve held it for more than 12 mths prior to selling, you get the 50% CGT discount, so the tax at your marginal rate is based on $34k. Assuming 40c in the dollar marginal tax rate, you’d pay $13,600 in tax leaving you with $54,400. Nice.
Ah, but then there’s about $2,000 in holding costs, depending on how long the property is vacant.
Calculating a return on your investment: 20% deposit plus 5% stamp duty legals and inspections = 25% of $220k = $55k. Plus reno costs of $45k = $100k investment. Which means you’ve got a 52.4% return on investment (52400 / 100000). That’s better than simply holding for growth – assuming you got growth at the long-term national growth rate of 6%.
Let’s say you got 10% growth on a 25% investment ($55k deposit and 5% other entry costs) and the property was neutrally geared…
10% of 25% is 40% ROI for sitting on your hands and allowing growth to do its thing. A fair shy short of 52%. So the effort to renovate was worth it.