Finding +cf propertys

Just because a house is cheap might not mean it is undervalued. There are two components to calculating your total return on an asset, namely (cash income + price changes over the period)/price at which the asset is purchased.

In Sydney for example people have bought assets which give a low cash income because they are expecting a large price change in the asset.

In country areas on the other hand your cash income is often higher because the likelihood of increases in the value of the asset is lower.

During the past three-four years prices in small country towns have risen dramatically, yet often the value of land has not increased or if it has increased the increase is less.

There are a number of factors which might have driven the low end of the market:

1.FHOG, in a lot of towns that $7K went straight into a price increase
2. WWW making it much easier to find property in the same state or interstate

The issue is what happens to prices in small country towns. While investors are still active there are fewer investors. 18-19 months ago I went to a number of open houses in Dubbo. Heaps of people, high proprtion investors. Investment properties advertised in the paper are often advertised for several weeks now.

There are a few towns whose prices I follow regularly. Since September in a couple of the smaller towns prices have dropped substantially. In a couple of instances I can identify for specific properties drops of 15-30%. In other cases I’m going by numbers of houses in windows, price ranges and conversation with locals.

By all means buy a cheap house somewhere, if that fits in with your investing strategy eg need a positive cash flow from the property, but don’t just assume (particularly if the property is already returning its best income eg a rented house or a fully tenanted commercial property) that values will go up even if the price you paid is less than replacement value.

If you want equity growth you’re going to have to solve problems that exist. One area where there ,may be potential is providing good office accommodation in country towns. I did that for a property for work this year.

Bear in mind drought is still affecting a lot of country towns in NSW. May be there will be a bounce when incomes increase.