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How To Buy An Investment Property - Articles

Buy The Cream, Not The Crap

Date: 01/03/2018

Last weekend I delivered my first, last and only 1-day Perth seminar to a packed room of savvy property investors.

During the morning session, I provided a comprehensive snapshot of the WA property market using six ‘market snapshot optics’ so as to conclude whether current economic conditions were favourable (i.e. a tailwind), unfavourable (i.e. a headwind), or neutral, to rises in property prices.

The conclusion: While there were green shoot signs of a recovery underway, until jobs and migration improved, headwind conditions were likely to cause property prices to stagnate in WA.

(Although my remaining seminars in Brisbane, Sydney and Melbourne are all now sold out, for a limited time you can purchase the full audio of the Melbourne event, and the market update sessions from Sydney, Brisbane and Perth here).

The morning session concluded with my brand new ‘Six Rules For Investing In Headwind Conditions’, and in this article, I’d like to flesh out Rule #3 – Buy the cream, not the crap.

Fort Myers – 2009

The genesis of this rule stems from my experience buying cheap ‘crappy’ properties (see below) in Fort Myers, Florida in 2009, in a region called Pine Manor (which the locals nicknamed ‘Crime Manor’). Prices were low (duplexes that were once $150,000 were now selling for $15,000+), and yields were as high as 20% or more.

While I had to pay cash because I couldn’t borrow in the US, I bought as many of these properties as I could afford, and I ended up with about 60 plexes that were forecast to deliver a huge annual net income on paper. Life was good… until you factored in the extra aggravation of dealing with properties with deferred maintenance, and tenants and management that were all in the category of ‘extra grace required.’

Six or so years later, those properties had increased in value three or four fold, which sounds impressive, but when you factor in the initial repairs, the turn costs every time a tenant moved out, and the aggravation, it wasn’t quite as glorious as it seems.

Good Advice From Uncle Zally

Reflecting upon this with my real estate mentor – Stu ‘Uncle Zally’ Silver, he observed, “You know 9-Cup (that’s what he calls me, after the nine cups of tea he claims I extract from each tea bag), you’d have been better off buying fewer better quality properties in better quality areas.” 

“How so, Uncle?” I replied.

“Well, those better properties have now appreciated more in value, and you wouldn’t have needed to carry a gun to collect the rent.”

Once again, Uncle Zally was right. While those ‘cream properties’ (in Cape Coral) were dearer than the crappy cheaper ones in Crime Manor, the yield I’d have sacrificed to buy middle class houses, in middle class Cape Coral would have been more than offset by the additional capital appreciation earned over the time I owned the property, plus the tenants would have been much less aggravating. 

The Lesson

When the property market is experiencing headwind conditions, real estate prices are soft and it’s easier to negotiate substantial discounts. In such times, I urge you to learn from my mistake, and seek to buy cheaper ‘cream properties’ that will be periodically on sale than the ‘crappy cheapies’ which may look enticing on paper, but will come with additional aggravation.

No, I’m not talking about multi-million dollar mansions, just nice houses, in nice suburbs, where nice people like to live. 

You’ll find that, as the market recovers, those with good jobs will be able to borrow more money, which will facilitate well-located and quality properties to appreciate quickly, whereas cheaper areas will remain the domain of investors and affordable house buyers – both of whom are always hunting for a bargain.

Do you have a question, a thought or a tip of your own to share? Join the discussion here by leaving a comment now. 

Until next time, remember that success comes from doing things differently.

Regards,

– Steve

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Want the rest of Steve’s rules for investing in a headwind, along with his rules for investing in a tailwind, and also the full recording of his Melbourne 1-day event AND the market update portions of his Sydney, Brisbane and Perth events? These are on sale now here for a limited time

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. AJ

    A couple of years ago I thought I had found an investor’s opportunity in a country town in NSW (name not given to avoid hurt to residents/investors in the town). Prices were attractive, rental yields were strong double digit, local industry and planning looked good. The types of properties I was interested in were in the lower price bracket. I jumped on a plane from Sydney and stayed a couple of nights. In the end I didn’t buy anything – I could see rental collections might be tough, maintenance was needed, ground had movement problems, and distance meant that I couldn’t do any work myself. Last night I took a look through my saved properties on realestate.com.au and found that 90% of the properties I looked at are still for sale. While in hindsight I can look at many suburbs I should have bought in, I am glad I passed on this area!

  2. Danbel

    Thanks for sharing Steve.
    I feel like this sort of approach was advocated by Jan Somers in an early book of hers 20-25ish years ago. Did you read any of Jans material?

    • Profile photo of Benny

      Hi Danbel,
      I don’t know about Steve, but I did read Jan’s books – like Steve’s, they were great reading for one wanting to learn quickly. What I recall from Jan’s teaching was to buy properties around the 3-5 in an area. This was a Decile scale (divided into 10) and the 3rd to 5th Decile was where she was looking to buy. Now, that scale is based on Property Values in an area. The Median for the area would have been 5/6 (right on the border between them). So, she was saying buy below Median – not the really crappy cheapies at 1 or 2 (the bottom 20%), but better ones UP TO the Median Value.

      Does that fit with Steve’s “nice houses with nice people in nice suburbs”? I’m not sure – could Steve have been thinking more like Median and above? I doubt a “3” on Jan’s scale would suit, but perhaps a 4 or 5 could !!

      Good question btw,

      Benny

      • Profile photo of Steve McKnight

        Hi team,

        I have not read any of Jan’s books, so I can’t comment on her recommended approach.

        What you’ve described here Les does seem sound under the principle of ‘buy the middle of the market’, which captures those trading up, and those trading down.

        A strategy may be to:

        1/ Research the median house for the area
        2/ Search for homes that are +/- 10% of that value
        3/ Buy the worst house in the best street, believing that land value will appreciate and you can always ‘value add’ to the property to bring it up to par with the land appeal.

        – Steve

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