Main Road Purchases

Hi guys,

My wife and I bought our PPoR about a year ago. It was in a good location however as we didn't do enough research and have enough knowledge about property, we bought on a main road which we found to be both busy and noisy. So after researching for about 6-9months in regards to investment properties, I realised our PPoR probably wasn't the best buy especially in terms of capital growth.

However, during the process of pulling out equity to buy an investment property, we were able to get $160k as one of the big banks valued (through their desktop valuations) our house $150k more than what we purchased it for. We purchased it for $500k and it was revalued at $650k - we are in Perth and our suburb has decreased by 2% since purchase so it was definitely not capital growth (or a bargain). The median house value is $670k, so was thinking we got the favourable valuation because our house was well under the median house value plus some houses nearby (new boutique places) were recently sold for big sums.
So we now have the opportunity to buy two investment properties which we hope to do within the next 12 months.

So it just got me thinking (and I probably won't do this), why not try and focus on getting a great property in a good location etc for your first property. And then for the second property, buy on a main road in a good location well under the median house value. As a result, you may be able to get a favourable valuation and you could start the process again. Obviously, in terms of capital growth, it probably won't be that great but hopfully you'll be able to sell in a few years time - and maybe with the small capital growth acheived, you will be able to offset the slightly negatively cash flows and buying/selling costs.

Anyway, I can envisage the responses with purchasing two great properties and use the future capital growth to release equity for your future properties. But it is sometimes tough to guess the market and get that initial capital growth. So maybe this is a good plan for the first few years to get a few properties under your belt.

Anyway, what are your guys thoughts on this?

Fitz

 

I see where your coming from. But if the property is valued 10% due to the main road the valuers will also know that but if you picked it up for 20%less well then your doing well.
I think the same for properties that scare people off they have sewer mains or easements, people automatically steer clear but it will have no impact on rentability and yield, if developing you can usually work around it.

Have you thought about renting out the ppor and then finding a preferred location for you guys to rent to boost serviceability and potentially borrow more?

 

Main roads generally grow the same as the suburb. Just a lower price point in and out

 

.Location aside, I think forming a strategy around a lenders niche policy is probably unwise. If the property isn't a great buy without the AVM, it's probably not worth looking at with it. You have to remember that an AVM val may not be 'real', and while it is great in that it allows you to borrow more than you otherwise would, it's increasing your risk in that you may actually have negative equity if you were to 'have' to sell.

 

You might have trouble leasing it and holding onto long term tenants.

 

Agreed with the others but on the flip side a main rd purchase could turn out to be a massive gold mine. Zoning may change to encourage commercial development along a main rd, something I have seen time and time again.

There are some houses on a very busy rd near me that are now engulfed by massive developments involving apartment and retail. When houses lines the streets admittedly many years ago it would have fit the category of not very desireable. Even now I would never want to live in one of these remaining houses but what I wouldn't give to own one. Even on a 650 bloxk they would be worth millions.

 

All around Sydney this is happening. These main road houses that no one wants have been rezoned and owners making a killing!

 

Yep. Carlingford Road is all townhouses now. And possibly units near the station. The land is now worth a few million....

 

My first PPOR was very similar; great location but on a main road. We inspected on weekends and regretted it when we got the keys on a weekday and heard (and felt!) the traffic. It required secondary glazing to reduce noises to a liveable level.

We weren't sure that it would rent well but we tried anyway; tenants stayed for 1-2 years on average, and downtime was minimal except for late last year when it was a renter's market.

Capital growth wise, it's as DaveM points out above; cost below average and is currently worth below average, but % growth has been very healthy.

The location of your property should help the capital growth so if there's a place you'd rather live, I'm sure it would make a great IP.

 

I'm new to the game but from what I picked up, you deduct 15-20% from the median house price (depending on what sort of property you have) and that will continue on into the future. So if that is the case, won't it grow slower over time than a house not on a main road? I do understand however that these % gap will decrease marginally over time as house prices do increase.
Or is this very different to your experience where they have have just run in line?

Just for interest sakes, my house is a standard 3*2 for our area, however it is probably slightly smaller. And the % gap was 32% less than the median house value.

 

I get your point, but there are no guarantees that you will continue to achieve a high valuation for secondary location that is the problem, it could be hit and miss, you got lucky this time.

Also, just on another note with tightening of finance I believe it is harder to access equity moving forward.

What if you want to sell, never say never, because **** happens, and then what?? back to the real value, its harder to sell in secondary locations when markets are flat, easier in booming market but still harder then a property in good location.

Just my thoughts. Now if it were a development site on a busy/main road then we are talking about a different beast, and I would have no problem buying on a main road if the figures stacked up and I could add value down the track.

MTR

 

So if you were forced to sell, the bank would take into consideration the equity when distributing the proceeds correct? So do you mean if you have a loan of $300k, equity of $100k, sell the house for $350k which would be proceeds of $50k however it would hurt your serviceability as you'd essentially be in $50k negative equity?

 

Haha our reaction was exactly the same! We couldn't believe how bad it was, and to make it worse, our bedroom was snug up against the road. We looked at double glazing but our bedroom alone would be $3.5k (sliding doors)!

Then a mate of mine hinted at just a normal stand-up fan as it would create that white noise which we thought was a myth.

$12 later, and we were sleeping like babies.

 

Yes, because it cost less in the first place so $ growth will be slower for the same % growth.

 

More like this - you have $400 in total fully drawn loans, and sell the house for $350 so you still have $50k outstanding that is not able to be recouped by the sale.

 

If you sell for $350k, the bank takes $300k to pay off the loan so you are left with $50k cash. It means you converted $50k of equity (350k-300k) into cash; you never had $100k equity.

 

Thanks Jess - if you have the $100k LOC used as deposits for investment properties so fully drawn down, essentially they could be recouped if the IP was sold? Or if you close down the $300k loan, does this impact your LOC's much?

Sorry, I probably wasn't clear - was meaning the house was revalued for example at $450k and you pulled $100k equity to use as loans for other investment properties - so this would be before the sale.

 

Ahh my bad, now Jess' reply makes sense

What do you mean by 'recouped'? If the IPs (for which the deposits were paid out of the $100k LOC) were not listed as securities for the LOC then I'd imagine they'd just ask you to provide $50k cash at settlement of your IP sale?

 

If the IP was sold, yes the funds could be recouped. If you sold the PPOR that had the IP LOCS attached to it and you didn't want to pay them off, you have to substitute security, either with new property, equity funds from another property or cash.

 

Such a horrible place now!