Veronica Morgan provides her expert advice about what happens when you try to get too much for your money.
Rhian and Jarad had a really interesting brief. They were pooling their resources to buy their first property and had looked at a number of ways to maximise their buying power.
Two of the options they considered were renovating to add value and renting out room/s to help pay the mortgage – as well as looking at property that offered a combination of these elements.
In order to work out what their levels of affordability were, they had come up with a complex spreadsheet that determined their maximum budget based on the amount of bedrooms the property had. And this is where it got complicated. They wanted to buy in premium inner city suburbs and gave me three budgets: one each for a 2 bedroom, 3 bedroom and 4 bedroom house. Trouble was, none of the budgets were quite enough for the number of bedrooms they wanted (as well as room for Rhian’s baby grand piano) – something had to give!
My concern with trying to get maximum bang for their buck was that they would end up buying a severely compromised property in a great area. There was really nothing that fit their brief that did not require serious renovation or else had something wrong with it that couldn’t be fixed. Location alone is not enough to secure good capital growth, which is really important to consider, especially for first time buyers.
The first property we showed them was in Petersham. It was a deceased estate, with loads of period charm, very spacious interiors and lots of potential. In the short term it needed a cosmetic overhaul and it also had scope for a complete renovation in the long term.
Now, I love to encourage people to renovate! But there is more to it than simply getting DA approval and wielding a hammer. After purchasing the property, they would then need to find additional funds to pay for the improvements and this is not as easy as it sounds. Plus there would be additional costs associated with paying the mortgage while the work was being done.
The big drawback for this property was that it had 4 bedrooms but a tiny outdoor area, so it was unbalanced. If they didn’t rectify this by demolishing some rooms and building a second story, the house would always be a poor performer. The boys didn’t have the funds to do the renovation so they wisely chose not to pursue the house. But they were tempted – Jarad had drawn up concept plans that looked pretty good!
Before we presented them with an alternate approach, we researched a whole lot of property in great locations that fit their spreadsheet criteria. But they all had something lacking.
One property in Glebe was especially tempting. It was a contemporary home in a quiet street. It offered 3 bedrooms and a spacious split level floor plan that would work well for sharing and renting out the third room. But its façade was unappealing and out of keeping with the area. Despite the reasonable asking price, this property took ages to sell in a hot market – what does that tell you?
A little house in Enmore looked like it might be a good opportunity. The owners were apparently desperate to sell and had overcapitalized with their renovation. It had 3 bedrooms, but the 3rd bedroom was more of a study so who would rent it? In addition, it was in a poor location (on a busy road, under a flight path) and no opportunity to add value at any time in the future. It may have been a bargain, but it would also have to be a bargain when the time came to sell.
Another house in Enmore was in terrible condition, with awful tenants – I couldn’t believe people were living in it! This was a classic case of worst house on the best street. It had loads of space and character, however would require a considerable investment to restore it to its former glory. I couldn’t encourage these boys to take on such a mammoth renovation project.
Over in Waterloo, an area that looks to be on the cusp of change, there was a recent build. This was a 3 bedder on a small block of land but it simply had too much accommodation squeezed into a tiny space (it would have even been a small 2 bedder).
In the end, we suggested that Rhian & Jarad consider an apartment. Even though they wouldn’t necessarily be able to add value, they could afford a good apartment with all the accommodation that they needed without having to make all the major compromises that buying a house in the same suburb would entail. As a result of buying a quality property, they would gain a much sounder footing on the property ladder.
But it wasn’t going to be an easy climb! First home buyers are behind the eight ball when it comes to competing with buyers who have equity in other property. And one apartment we found for them was sold to an investor while the boys were still getting unconditional finance approved.
Then there was an apartment I bid for at auction for Rhian and Jarad off camera. It had a lot of good things going for it BUT the building was located on a busy road. Even though the apartment was at the rear of the block and not noise affected, in a buyers market the address alone will stop people even looking at the property, so it will be hard to sell under those conditions. But it's not fundamentally a bad property to buy as long as you don't pay too much for it.
We looked at the recent sales in the building and we also looked at the prices that two bedroom apartments were getting in the neighborhood. Rhian and Jarad set a realistic limit for their top bid, but the auction was simply too competitive. In my mind, the person who bought the property paid too much. And while it was disappointing for the lads to walk away from this property (they could have afforded more), it was a wise decision not to continue bidding.
There are some properties worth paying a premium for. But in a hot market, you need to be very careful not to get caught up in the general wave of positivity. I have seen plenty of properties that sold for inflated prices in a boom lose money when the market flattens out. But other property can be competitive in all markets.
With their original brief they ran the risk of buyng a house that would struggle to sell in a slow market. It took them a while and more than a few attempts, but they ended up securing a great apartment in Surry Hills. And the added bonus is that it is large enough for Rhian’s piano!
Veronica Morgan also blogs on her website: www.gooddeeds.com.au/buyers-tips-and-the-property-market.