My point is that even if you invest wisely, it takes time for that wisdom to play out and recover the expense of buying. At the instant of buying, you have already lost money whether it was an astute decision or not.

There’s no such thing as the discount-flip like there is for the reno-flip…

You can’t buy an under-valued property and then sell it for market value next month. If that’s the strategy, you won’t make much money. So, what is a useful strategy then?

If you buy under market value AND get capital growth, that would work – but over time obviously. You want that time to be as quick as possible. You want immediate capital growth.

The problem is, the best markets for capital growth are the worst markets for buying under valued property and vice-versa. Hence why attempting to buy under value may not be the smartest strategy.

The whole point is the plan an investor has for the property. If an investor’s focus is on making money when they buy, they may not have a plan in place for the property after they buy it. They may simply be trying to buy a bargain. They think they’ve made money when they bought. But they haven’t.

By instead focusing on what happens after the property is bought, you’re more likely to realise a profit. E.g. reno, subdiv, dev, cap growth, yield etc. All of those strategies require a plan prior to buying and an implementation of that plan after buying.

In the case of cash-flow, the investor will focus on the income vs expenses and vacancy rate and landlords they’re competing with for tenants.

In the case of capital growth, the attention is given to supply and demand.

In the case of a reno, the investor estimates costs and new value.

In the case of … etc.

The focus is not on buying cheaply. The focus is not on making money when you buy. The focus in all these cases is on making money after you buy.

It’s that focus I’m talking about. Buying cheaply isn’t a feasible strategy. There’s no such strategy as the discount flip because we lose money when we buy.

I checked out your website HomeBuyerLouisiana. As I thought, you don’t make money when you buy. The very 1st case study on your website says you put effort and money in.

As I mentioned in the full article, investors make money when they hold OR ADD VALUE. You’re making money by adding value – not when you buy. The buying part may represent a FUTURE opportunity, but you don’t actually make money WHEN you buy. It sounds pedantic, but there’s an important point behind it…

Investors sometimes think they’re locking in “instant equity” at the time they buy, if they buy under market value. But there’s no such strategy as the “discount flip” like there is for a “reno flip”.

It sounds like you’re making money from adding value. Nothing wrong with that. But the point is, there’s no such thing as instant equity simply from buying cheap. In your case, effort has to go into “doing up” the property before a gain can be realised. In my case, I’m allowing time to pass to gain equity.

You may have bought a great “opportunity” to apply a strategy and make a gain. But at the time of buying the property, you’re behind. Something has to happen “AFTER” the purchase to make the gain. In your case, it’s a reno. In my case it’s sitting on my hands and collecting equity. But none of it happens at the time of purchase. On the contrary, we lose money at the time of purchase.

The focus for the investor should be on what happens after they purchase, what’s their plan? Is it to renovate, is it to subdivide, develop or hold for cash-flow or equity or a combination? The buying is not where the focus should be, but on what happens after buying. That’s where the money is made. But when you buy, you lose money.

• This reply was modified 3 years, 7 months ago by  Jeremy Sheppard.

Thanks for the kind words Steve. I’d love to chat. I’m Sydney based but in Melbourne till the 19th.

I’ll send you a private message.

Hi mnapier,

I get a lot of strong opposition on this topic. Mostly from those who derive revenue from selling new. No apology necessary.

The statement about it being mathematically impossible to outperform is on the assumption that all other things are equal. This wasn’t clear early on in the article. So, I take that criticism on the chin.

The full article goes on to compare 2 properties that are identical in every way except one is new and the other is old. In this case it is impossible for the new to beat the old – mathematically.

Yes, eventually the old property will have to be knocked down and rebuilt. The article covers this case. One plus of this scenario is that the profit is the owner’s not the developers. And yes, as soon as the new property is built, the rate of growth as a proportion of the property’s new value will decrease. And it’s because of depreciation. Buildings depreciate and land appreciates. If more of an investor’s money goes into the depreciable part of the asset (e.g. by capital injection), the performance overall is reduced until the depreciation of that capital injection washes out.

So, although it sounds bizarre, the same property will suddenly start to under-perform in capital growth immediately following a knock-down-rebuild. And the reason is depreciation of the capital injection.

There is nothing beneficial about depreciation for those pursuing appreciation. Many make the mistake of assuming depreciation is simply a tax write-off. But depreciation is a real thing. An investor’s dwelling ages and therefore loses value.

Yes, you should claim depreciation, but you shouldn’t go hunting for properties with higher rates of it. Since every bit of depreciation opposes appreciation.

If you can claim $10k in depreciation for a financial year and you’re paying 40c in the dollar tax, you’ll pay $4k less tax. But this is not a benefit. The investor is not “better off” by $4k. They are actually worse off by $6k compared to not having any depreciation at all – i.e. their dwelling barely aged.

Older properties do not depreciate as significantly as newer ones and therefore have better appreciation. The chart clearly shows the relationship between age and growth.

The law of supply & demand is about 400 years old and is a fundamental of price change. To see maximum growth in the price of anything, there needs to be minimum supply and maximum demand. I suspect you’re not arguing against that. But whether new property represents supply. I do, but even if it isn’t called “supply” whatever it is called, there is a relationship between lower growth and whatever it’s called as the historical data indicates.

Something that would lend more credit to your arguments would be some supporting data. It took me months to acquire the data, analyse it and write up the report…

https://selectresidentialproperty.com.au/busting/new-properties-under-perform/

The purpose of the series was to “show up” opinions with a stack of evidence. Opinions are plentiful and cheap. Perhaps you’re examining a different data set to me. What are your sources?