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August 23, 2013 | Media Release
According to a Perth property buyer’s agency, potential investors should tread carefully before rushing in to buy properties at the lower end of the market in suburbs which feature the biggest price gaps.
Australian Property Monitors has released figures for the 12 months to June 2013, naming Dalkeith, Cottesloe, Applecross and Mosman Park at the top of the list of suburbs in which the range of house prices varies the greatest. In the case of units, Applecross comes in first, followed by Claremont, Cottesloe and Subiaco.
Big price gaps
Property Wizards Buyer’s Agency’s Liz Sterzel, said that while it can be a sound strategy to invest in areas with big price gaps if you do your research, there are a few key dangers to watch out for.
“Buyers will sometimes look at the highest price achieved in a suburb or the highest quartile median and see this as the potential ceiling for resale if they are investing in the area,” Ms Sterzel said.
“The idea is that you could buy for a low price, i.e. in the lower quartile, and add value- potentially raising it to the higher quartile.”
Compare Like Property Types
However, Ms Sterzel stressed the need to consider similar types of properties being sold. She said the lower quartile may comprise mostly properties on small blocks, older properties or a lower priced segment of the suburb, whereas the higher quartile may include new properties, bigger blocks of land or encompass the premium pockets in the suburb.
“If this is the case, buying in a poorer location and adding value would not improve the location in the suburb and you may never reach the level of the premium segment prices. This applies similarly to block size and property type, size or age.”
West Perth apartments
“For example, amongst the apartments advertised for sale in West Perth, the highest six advertised prices are over $1.5 million, while the lowest six are under $300,000.
“You can’t turn the lowest priced into the highest priced by adding value, because the $300,000 apartments are small apartments in older buildings, whereas the top six are large luxury apartments in prime locations with views,” Ms Sterzel said.
“You can’t change the location and in the case of an apartment, you can’t change the size or the building.”
If you are looking at renovating to make a big gain, Ms Sterzel advised finding examples of older homes and examples of renovated homes on similar sized blocks in similar parts of the suburb to see the potential increases in price.
“Don’t compare an old fibro 3×1 on 500sqm of land with a renovated brick 4×2 house on 900sqm to see your potential gain in price,” she said.
The suburbs named as having the biggest price gaps are well established and out of the price range of average investors, but for those with the money, Ms Sterzel said there are two opportunities:
“The higher risk opportunity is buying to add value in a big way- either by gutting and renovating completely or demolishing and redeveloping, ideally with subdivisible properties. It’s a high-risk, potentially high-return option that is not for the faint hearted,” she said.
“It is essential to buy at a low price, so sourcing the property is key. It must be a prime location to catch the big potential upside, and use professionals for the project design. Areas where you might consider this are Dalkeith, Cottesloe and Mosman Park in the Western suburbs, as these are prime areas with limited supply and big price gaps.”
“In the price ranges that are accessible to more investors, a good strategy is to aim for older villas or apartments in the best suburbs you can afford.
“For example, in Subiaco there are many such properties ripe for renovation. It’s an area on the doorstep of the city, close to public transport, work opportunities and a great lifestyle so your rental prospects and future buyer demand are pretty much assured,” Ms Sterzel said.
“It’s a great opportunity to do a high grade renovation that doesn’t cost a mint, because you’re not doing external or structural work as you might do on a free-standing house, but you are giving the property a great lift in value and rental potential if you get it right.”
“Subiaco has such a diversity of property that you really have to look at the type of home to understand the opportunities.
“Older federation homes on free-standing blocks have brilliant renovation potential but you have to spot the right ones so each dollar you spend adds value and doesn’t disappear into repairs or unseen upgrades.
“The biggest gain of course is holding these properties for the long term for capital appreciation, but the yield is low so it’s a cost to your back pocket.”
“Mount Lawley has similar opportunities to Subiaco with its mix of older federation homes, units and villas as well as opportunities for new development for those who have deep pockets.
“If you’re renovating a federation home, it’s essential to stay true to the original style of the property, especially on the exterior, with modern interior wet areas being quite acceptable.
“Mount Lawley also has some low priced older apartments in the $300,000’s that have renovation potential and with these it’s important not to overcapitalise.”
Choosing a good investment
According to Ms Sterzel, choosing a good investment depends greatly on the investor’s aims.
She said that if you want to have a positive cash flow as soon as possible and are not so concerned about a growing asset, you could look in lower priced areas for smaller, newer apartments or older houses.
“Of course there are drawbacks- the big one being that when you come to sell, you may not have the increase in price that you would have hoped for,” she said. “Commercial properties can also fit this profile.”
Alternatively, Ms Sterzel said that if your prime motivation is to accumulate assets to later sell or convert to high cash flow investments when your income drops, you can’t beat buying to add value, such as renovating, subdividing or developing in the best area you can afford.
Buying the worst house in the best street
“There are two components to buying the worst house in the best street.
“Buying in the best street is the driving part and it means your ceiling resale price is higher. If you add value, you’re less likely to overcapitalise and you have a bigger pool of buyers to compete for your property. But it also comes with a price tag and you have to be prepared to pay more in the first place,” said Ms Sterzel.
“Buying the worst house doesn’t give you any advantage unless you’ve evaluated the renovation potential or unless you’re buying for redevelopment and you’re getting the house virtually for free.
“When buying the worst house to renovate, don’t forget to have a building and maintenance inspection so you don’t end up with unforseen expenses not visible to the untrained eye.”
The Perth property market
Ms Sterzel said prime investment and add-value opportunities have been scarce since early 2013, when the Perth market made its comeback.
“You would expect a few more opportunities due to the pause in mining jobs, but the competition is still strong for good, add-value properties at or within $200,000 of the median price range,” she said.
“The reality is that there are so many people earning high incomes in the resources and support industries and this is set to continue for the next few decades.
“This, together with the strong population increase rate in WA and the strong economy means that holding out for better buying prices is unlikely to work for investors.
“The best move is to choose your strategy, do your homework and get on with it or risk missing out altogether.”