Clueless FHB - looking to build a valuation model

Hi there,

Looking forward to joining the community on here and learning more about the property market.

Context
Unfortunately, I am a complete novice with this asset class (not that I'm much better in other markets), but I'm here to learn primarily because I've been telling my better half that we should wait and hold off on buying in Sydney until the time was 'right'. No doubt a wise soul on here will probably point out that there is never a 'right' time, but the changing market sentiment and political posturing would seem to indicate that it's time for me to hold up my end of the bargain and actually start learning (which I should have much earlier).

I'm a slow learner, but thankfully having browsed a few different sources and including some threads on here the Sydney market may ease into a lull for the next few years - hopefully, sufficient time for me to learn the basics.

Queries
So I know this is an introduction, but I do have a few queries if there are any kind souls willing to point me in the right direction:

1. How do people (you) evaluate and assess whether your property purchase is 'good value' or a 'high quality' asset?

Anecdotally among my peer group (millennials), there have been less than a handful that has been able to describe to me a quantitative approach they adopted to actually make a purchase (you could say at least they made a purchase during the boom, instead of wallow in stagnation like myself though). Typically the response is along the lines of, it was the right place, seemed like a good price and was cheaper than similar/recent sales (maybe they didn't want to divulge trade secrets).

Unfortunately, as an over analyser the above approach doesn't quite warm my cockles (but it's better than responses of, sometimes you just need to go with your heart/gut). Also, just because a bank valuation provides a number or an online platform generates an estimate seems to be inadequate in my mind (as you aren't across their underlying valuation methodology or the bias they might have in terms of wanting to promote continued growth in the sector).

2. How do people source meaningful data (importantly both local markets and internationally) - e.g. long time series rather than a short snippet?

I presume the answer is you simply have to pay for it (unless I can automate copy and pasting or scraping auction result data).

3. Also keen to understand how many of the savvy investors on here utilised te FHOG - particularly if the subsidy is already priced/baked in. However, it would seem silly to forgo the concessions - at least on face value.

td;lr
Newbie looking to learn before potentially considering an IP loan for a PPOR purchase in Sydney - whether it will actually be in Sydney will hopefully fall out of the learnings, as strategically it may make more sense to start off the interstate.

Cheers,
Bill

 

Looks like I might just need to build a list of all free AVMs as an easier starting point to building my own one.

 

Welcome to the forum Bill

Broadly, you're going to find answers to most things by browsing / searching the forum. There is a wealth of knowledge on here!

If I look at your queries:
1) High quality investment for me is a high return asset with strong stability (either yield or cashflow). Usually this means a blue chip area which have constant strong demand. Contrast this with buying a house as an investment in a mining town that yields 15% return if the mine shuts down. I let the numbers determine what is value.
2) Plenty of free resources, also specific networks of people can help you out with specific questions with access to tools like RPData etc.
3) FHOG was way back in the day for me, I took full advantage by purchasing my first and living in it for 6+ months. Fortunately I have good paperwork, because I was actually audited and was able to prove this when the question came up.

Good luck with the search, I am sure you'll pick things up quickly

 

Thanks Morgs/Richard.

I think it is going to take me a while to get up to speed given the number of variables at play. Also need to potentially hunt down a no-LMI loan for professionals, but then I need to do the interest rate comparison.

Lots of learnings ahead, but this forum and I came across another site mentioned on here will definitely be invaluable.

Also appreciate your response to the queries, was more of a random brain dump when I typed out the post before I've had the time to actually go through the forum.

Cheers

 

@billbro your post reads as if you're looking for an instruction manual for how to value a property and how to invest. Perhaps a 'paint by numbers', or a simple app that will help figure it all out. It's just not that simple.

There are lots of resource out there. CMA (Comparative Market Analysis) reports are really helpful. Property investment magazines have great stories, plenty of BS and very useful data in them. Go to investor meetings (plenty advertised here) but avoid the commercial ones trying to sell you something. Lots of good books on the subject.

Probably the best resource is this forum, but you're not going to find a simple manual here, it doesn't exist. What does existing is a huge knowledge base that can be tapped into.

At the end of the day, to figure out what properties are worth you need to do the hard work. It's not hard to collect data from various places, but you need to hit the streets. Go to as many open houses, auctions, and even rental viewings as you can. Over time, you will get an understanding of the local market. Knowing the market will allow you to know a good deal when you see it.

Alternatively you can pay a buyers agent to find the property. I personally thing they're well worth it but it doesn't absolve you from doing your own research either.

Unless you're a doctor, accountant, lawyer, etc, and meet some additional criteria, these loans are very limited. The few that do exist come at a cost and you're almost certainly better off paying the LMI.

The other way to avoid LMI is to simply save a 20% deposit.

 

Peter, I didn't expect there to be a simple manual - as I said, more of a quick brain dump as I begin the tasks of learning the basics.

While I completely agree with hitting the streets and it's already part of our to-do list. I personally don't feel that it will be sufficient to provide us with the ability to 'know' a good deal - even if we did this over a long time period.

Visiting properties will be valuable to us as novice purchasers, but I see it as primarily helping us understand what we 'like' - as we may not have the experience to spot structural issues, flaws, problems, etc. So ultimately, it's going to help us build a soft factor/overlay to the prioritisation/ranking of properties, but not sure if it will help us assess 'value' - particularly over a longer time horizon.

I doubt this would be the path we ever go down, as it removes the learning potential from the purchase - at least not at this stage of our lives.

I'm in one of those professions and we should meet the additional criteria (e.g. income). I'm not sure why I am better off paying the LMI unless the interest rate differential is significantly larger but keen to hear your thoughts?

I appreciate that saving for the 20% will avoid the LMI issue, but whether we had 20% or not will depend on our price range. While I could backsolve for the 20% by calculating what we can afford and stress test for a few interest rate hikes, I'd rather build a bottom-up view first before biasing ourselves based on the budget we have set.

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Also, I actually think it is quite hard to collect the data (unless I pay for RPLogic access) - it's not readily publically available and easy to access. To be fair this is the start of the process for us and I may have just missed some easy tidbits, but that's why I'm on here to try and learn more.

 

Hi billbro,

Visiting lots of properties and attending auctions over time is by far the best way of understanding the market value of properties. If you keep tabs on every new property within a few basic parameters online, then get out there on Saturdays to look over the ones that interest you, how could you not get a good understanding of prices in the local market, or what is or is not in demand for the area?

It won't give you an understanding of structural integrity, that's why you get a professional building and pest inspection when you purchase.

There are some lenders that have products with no LMI but the interest rates are higher to the point where you're probably better off to pay the LMI. For example, Citibank have an 85% loan where they waive the LMI, but it's about 0.6% more expensive than what you'd get elsewhere. Given the LMI premium for an 85% lend is not much more than that rate difference, you're probably better of going with a cheaper product and paying the LMI rather than being stuck with a higher rate for a couple of years.

Collecting data really isn't difficult. One of the property investment magazines has a huge amount of general data in the appendixes of every issue which is really useful. Many of the brokers provide free CMA reports to their clients. At the end of the day however, getting out there on Saturdays is what will really give you an appreciation of what's happening right now.