By Victor Kumar
Successful investors understand that it’s not when you sell a property that you profit, it’s actually when you buy it.
Another way to think about property investing is to start with the end in mind and to understand how the price you pay today will impact your portfolio’s performance over the long-term.
Spending too much on a property from the outset can mean that it takes longer than necessary to grow in value, which ultimately will reduce your total capital growth or equity position.
Also, buying a brand-new property, for example, means that you usually pay a premium for it and you don’t have any ways to add value to it because it’s new.
So, one of the keys to starting or growing your investment portfolio, is to find properties that are under market value.
Now an under market value property is very different to a cheap one that is bargain-priced because it is severely broken. Unless you like flushing your money down the toilet or burning it in your fireplace, it usually is never a good idea to waste good cash on a bad property.
There are a multitude of reasons why property might be under market value, which I’ll outline in a series of blogs on this topic.
In this first one, however, I’ll take you through the concept of what an under market value property is and, importantly, what it isn’t.
Firstly, many properties are on the market for under their true value because they need significant repairs or perhaps are just in poor condition after many years of neglect.
With properties that will need some “sweat equity” you always need to complete a comprehensive feasibility analysis to ascertain whether the numbers stack up after the repairs or renovations are completed.
Certainly with cosmetic renovations, there is the opportunity to make great profits relatively simply and quickly as well as being able to rent out the property for a higher weekly rent because it looks much better and is more attractive to tenants.
Even with more structural renovations, as long as the numbers add up, these properties could still make good investments if you’re buying them significantly under market value.
Another reason why property is often on the market under value is because the vendor needs to sell quickly.
This can be because they are in financial trouble, are getting divorced, or perhaps it’s a deceased estate.
In this type of situation, you are dealing with an emotional buyer so you need to ensure you keep your demeanour appropriate otherwise you might end up making the deal more difficult than it needs to be.
Of course, if you’re building a property portfolio, the aim is to purchase multiple properties by leveraging off the equity in these properties to invest further, or buy property and sell it to invest the profit in further property, with the ultimate goal being to own the properties outright.
So, the better the price you buy your property for, the bigger your profits, the more you can accumulate and the quicker you can get to the celebrate stage of your investment journey.
An important distinction with under market value property, however, is I’m not talking about negotiating down the price until you’re exhausted and the seller is bitter and wishing you’d never darkened their door.
While it’s always important to negotiate for property, no one likes someone who behaves in such a way that leaves a bad taste in everyone’s mouths.
Under market value property is listed for a price that the seller (most probably) knows is below its true value if it was in a better condition or they had more time to sell.
The trick is to find under-valued property and see the potential profit and how it can be realised.
Of course you must have a strong understanding of the local market to recognise whether a property is under-valued or not.
You could also use a valuer but that costs money you really don’t need to spend if you’ve done your research or are using expert buyers’ agents like us.
Valuers also tend to be very conservative with their property values, which might mean you then think the property is on the market for more than it is worth, when in fact the price might be right and you end up missing out on a solid property to add to your portfolio.
So, hopefully now you understand what an under market value property is and what it isn’t.
In my next blog in this series, I’ll take you through one of the most common reasons why sellers list their properties for less than they are worth, which is financial and emotional distress.
By Victor Kumar