Expert Bust #8 - You don't make money when you buy

Discussion in 'Investment Strategy' started by datageek, 9th Feb, 2021.

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  1. datageek

    datageek Well-Known Member

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    There's this expression I hear a lot from professionals in property investment, "You make money when you buy". But it's the other way round...

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    You make money when you hold or add value, and even then, only if you've bought the right kind of property in the right place at the right time.

    Usually the expert means by buying cheaply you've locked in some profit. But every time someone buys below fair market value, there's a blight on that suburb's demand vs supply equation. The biggest bargains are in the worst markets for growth. There are no bargain to be had in the hottest markets.

    I'd rather buy above current market value and 12 months later it looks like I got a bargain, than pay under mkt value and 12 months later it looks like I paid too much.

    Instead of focusing on what they get right now, the investor should be focused on what will happen as they hold over the next 3, 5, 20 years.

    Or how much value they can add (reno/subdiv/dev).
     
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  2. D.T.

    D.T. Specialist Property Manager Business Member

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    Absolutely make money when buying
     
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  3. spoon

    spoon Well-Known Member

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    Haha, of course! If only we all have a clear crystal ball and a time machine...:rolleyes: Easy to say than do, although such predicting skills can be sharpened through learning from posts on PC and experience in this game.
     
  4. twisted strategies

    twisted strategies Well-Known Member

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    some skill is required yes , but it you are buying in a city or near a city , all you need is a detailed map , and know a bit about human nature

    now patterns MIGHT change in the future ( ' to 'smart cities' ) but if they don't , cities spread out what was the fringe of the city in 1950 is now a trendy suburb threatening to become an inner city suburb , just 6 miles from the GPO ( as the crow flies )

    the same property is only the stroke of a pen ( council planning approval ) from a multiple townhouse development ( i would have said not a hope ten years back )
    but now i see the buildings 150 metres away and think maybe i should ask ( town planning )

    now the OP probably has years of real estate experience , but relative novices can quickly get a good idea .. how close are shops , schools , hospitals and what is the public transport like ..

    after that you can look at the property shape , size , slope of the land , for practice look at where you are now , any relatives and friends properties

    AND CHECK IF THE LAND FLOODS ( anytime in the last 100 years )
     
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  5. spoon

    spoon Well-Known Member

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    Agreed! If one bought in Sydney and Melbourne, just buy anything 20km CBD and you will be fine. :D
     
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  6. Shogun

    Shogun Well-Known Member

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    You do make money when you buy. You see potential. Be it capital gains, value add or subdivide etc and pay the "investment" value for the property. It doesn't always mean paying cheap. Selling is just the return on the investment.

    Otherwise you are gambling on the outcome. Buy a dud and it probably will always be a dud. Perhaps a better title would be. Paying less than market/investment value for an item doesn't make it a good investment.
     
    Last edited: 10th Feb, 2021
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  7. Sackie

    Sackie Well-Known Member

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    Personally I believe you make money when acquiring the asset. Buying requires, asset choice, location, price you paid and overall value. All crucial aspects.

    Selling doesn't mean anything if you bought in a crappy location or paid a terrible price or bought the wrong stock type ect. So clearly, the buying process is key. Then the magic is in the holding. I'd say the selling is the least important factor.
     
  8. skater

    skater Well-Known Member

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    This!
     
  9. paulF

    paulF Well-Known Member

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    That image about what you lose when you buy makes no sense. That is simply the buying process and add to that some of the above like items stamp duty might not even be there in some circumstances (FHB).

    I always thought that the saying is as about both, buying a bargain and as you say, about buying the right kind of property in the right place and time.
     
  10. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

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    Very interesting thread. One of the things I say to my clients - particularly the ones that say they want to buy under market - is that unless you buy at auction, you don't really know if are paying overs or unders for at least two years. Uncomfortable, but true.
     
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  11. Scott No Mates

    Scott No Mates Well-Known Member

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    What absolute BS of a statement. It costs money to buy but unless you do the analysis of opportunity cost, you wouldn't know.

    If you don't buy (invest wisely), you definitely won't make money - you are exposed to risk (both positive and negative) but sitting on cash in the bank also poses a risk (erosion by inflation, bank failure etc).

    Realisation of what you have bought is a dog or a star performer is by independent valuation against highest and best use - not on day one but at some time in the future (unless of course you found a asset rich but uneducated person willing to offload their assets for a peppercorn).
     
  12. skater

    skater Well-Known Member

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    Let's just break this down for one of my purchases, shall we. It was a few years ago, and the market stale. Purchase price was $150k. Similar properties for sale & sold were $190-$210k.

    Stamp Duty Approx $4k
    Legals Approx $1k
    Building & Pest $0 (Hubby in building industry, but if we had paid would have been less than $1k)
    Arranging finance $0
    Research location $0 - know the area like the back of my hand
    Visiting properties $0 - didn't need to look at other properties because, as above, knew a good deal when I saw it.
    Haggling $0 - How you can put a price on some of these is just ridiculous, but minimal haggling as had been on the market for a long time & vendor accepted the low ball.

    Valuation $200k

    So, on purchase, made $45k. Sold a couple of years later for $310k.

    No, you don't make money when you purchase, do you?
     
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  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The analogy is correct. Same with shares. Its not a profit until you sell. And you could see it rise and fall a little at times. BUT....

    With acquisition costs paying a large barrier to entry and adding to costs most buyers of property buy at an apparent loss. Those who can buy "value" so that the market value after some basic reno's exceeds the costs of the purchase + duty + legals + reno's is better than someone who starts behind. You are ahead of the pack. But that may not always stay thatw ay. A dog could then remain at theat value v another that is going to rise better over time. But starting ahead helps.

    But its also worth remembering the stake invested. If you buy a $800K property with 20% deposit and the actual costsbase is $835,000 you are leveraging based on your inital own savings only eg $110K. So if the property rises in value to $960K you may DOUBLE your money before tax. This is a multiplier effect and should never be ignored. Then perhaps access 80% of the equity and repeat. I have seen people put 100% borrowed money in who turn a profit for $0 in. You just have to consider the leverage risk of that. I have seen people buy a rental for the price of a cup of coffee each week to own it. And they make tens or hundreds of thousands of dollars.

    Leverage is a key issue to property investors. The bank just wants its loan repaid and doesnt share in profits
     
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  14. spoon

    spoon Well-Known Member

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    And the bank only wants you to pay for today's loan with tomorrow's or up to 25/30 years (deflated) money, without asking for the inflation adjustments. With such a low interest environment, it is good.

    And it allows you to keep the whole of the rental incomes from Day 1, despite you only own 20% of the property. :D
     
  15. MTR

    MTR Well-Known Member

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    Cant you have both

    make money when you buy as you managed to source under market value, and access equity........and make money when you sell for these reasons...... right time in the cycle, add value by either renovating, developing or selling with a DA.

    Who cares, as long as you make money
     
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  16. MTR

    MTR Well-Known Member

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    If you are lucky enough to buy under market value you can actually access equity, I did this after I think 3-6 months on a property. Its money in your pocket, realising a profit without selling the asset

    May be harder to do this today due to tightening of lending criteria
     
  17. Sackie

    Sackie Well-Known Member

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    @MTR many people don't believe in BMV, they say whatever it sells for is the actual market value. IMHO it's simply not true. And that is because real estate can be bought and sold AWAY from the entire market, for all sorts of reasons. True example, I think it was November 2019 I helped close friends buy a unit 50k BMV. It was bought off market through an agent who had off market listings from people who didn't want to list in the general market ( for all kinds of reasons, often to their detriment but that's life).

    Long story short managed to snag this unit 50k below what many, many comparables sold for. If it went to the market, it would sure have gotten 50k or more, given the recent sales.

    That's a clear example of how the concept of BMV absolutely exits.
     
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  18. Perthguy

    Perthguy Well-Known Member

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    I agree. I bought a house that was subject to a sale or seizure order from a bank. I was not at my limit and there was another buyer putting in offers but the agent had to negotiate a deal that day. There was no time for the agent to negotiate up to market value. I offered more than the other potential buyer, so the seller walked away with a small debt.

    If there had not been time pressure to sell the property and the agent could have played two buyers off each other, the property would have sold for more (I know I would have paid more to get the deal). In that case, it was definitely under market value, even though people deny BMV exists.

    Either way, we definitely made money on that deal :D
     
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  19. Sackie

    Sackie Well-Known Member

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    That's one of the things I love about real estate. You have the very real ability (not saying its easy but it exists as we both experienced) to acquire an asset where A) the general market don't get the opportunity to compete and/or B) the REA is incompetent/lazy/not bothered/ whatever the reason, to do the best job for their client and gives you useful information where you can gain the upper hand in negotiation etc or C) gives you a stab and preference at deals first before others because you have an ongoing relationship with them and they know you can close deals fast which is not necessary in the best interest of the seller.

    These things happen everyday. Usually if an investor is actively wheeling and dealing and this is their business which they take seriously, then they will likely be very cognizant of this and try to utilize it to their benefit.
     
  20. MyPropertyPro

    MyPropertyPro REBAA Buyer's Agents Sutherland Shire & Surrounds Business Member

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    I think both are true and it depends on whether the property is acquired off-market from a vendor looking to see a quick sale where you could pretty easily see if it's BMV relative to surrounding comps based on experience. However if it sells at auction for a price less than what you were willing to pay is it BMV? No, you probably were just going to pay too much....but were you? ;)

    - Andrew
     
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