All Topics / Help Needed! / what if the market is dropping?

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  • Profile photo of UnicornUnicorn
    Member
    @unicorn
    Join Date: 2004
    Post Count: 10

    Based on info at Sydney Masterclass, we can use the strategy of searching for property with a higher than average yield, fix whatever the problem is with the property that has caused it to have a higher than average yield, and then sell it at a lower yield to turn a profit. I can see how this works when the market is flat, and works even better in a boom, but how does this work in a falling market?
    Lets say you purchase a property on a 5% yield which requires minor reno, and the area currently has an average yield of 4%. If you allow 4 mths for reno and resale, you are a bit stuffed if the market falls and average yield in the area has gone up to 5% in those 4 mths.
    Can anyone help me to understand how this?
    Thanks
    Marianne

    Profile photo of AUSPROPAUSPROP
    Participant
    @ausprop
    Join Date: 2003
    Post Count: 953

    not having been to the class, can you explain why a problem with a property would give it a higher yield? I understand that the capital value would be lower because it has a problem, but wouldn’t this reflect in the rent? and if you do a reno won’t your yield become nil whilst you do it? then when you find a new tenant it will just be like any other property.



    http://www.megainvestments.com.au

    Extensive list of ‘Off The Plan’ property available for sale in Perth.

    John – 0419 198 856

    Profile photo of UnicornUnicorn
    Member
    @unicorn
    Join Date: 2004
    Post Count: 10

    Thanks for your reply.

    I am having a bit of trouble answering it because I am still in the process of getting my head around all the info! but I think the point is that the market isn’t quite that logical, or the yield would be identical on all properties in an area, which isn’t the case. A problem with a property would not necessarily give it a high yield, you are just looking for one that does. e.g. last year we bought a house on a 7% yield when the area average was about 5.5%. The only reason that we can figure for this was that it was very badly promoted. Anyway, with minor cosmetic work we would expect to turn a profit of about $40000 if we resold back into the market @ 5.5%. (This is the theory anyway).
    All holding costs and costs of reno should be factored into your calculation of likely profit. You shouldn’t do the deal if there isn’t enough profit in it, and you don’t hold on to the property, you sell it, because this was your plan in the first place. (ie buy a problem and sell it when you’ve turned it into a solution). This means you can derive positive cash flow in any market regardless of whether the average yield is 10% or 3%.
    I hope this makes sense.

    Profile photo of XeniaXenia
    Member
    @xenia
    Join Date: 2002
    Post Count: 1,231

    hi unicorn,
    im not sure what the masterclass is, as I try to steer away from advertising. However, what you say does sound logical. You can factor in a predicted downturn in the market as part of your risk calculations. Ie after you calculate what your profit will be, ie what the property will sell for at the correct market yield. Take away from that, what percentage of downturn does it take to make your profits equal to zero. Ie if you are making a 20% profit, then the market will have to go down by 20% in the time available for you to break even. Then you have to logically guess how likely that is to happen. Maybe steve can describe this better than me.

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    Profile photo of ANUBISANUBIS
    Participant
    @anubis
    Join Date: 2003
    Post Count: 559

    Sorry I can’t see why a property with problems would have a higher yield. It is more likely to have an appropriate yeild for value, so that if you fix it up it will be just the same as equivalent props in the area.

    Sounds like a nice case study for a workshop rather than something for application

    Profile photo of UnicornUnicorn
    Member
    @unicorn
    Join Date: 2004
    Post Count: 10

    Hi anubis
    Thanks for your reply. Do you find that all properties in the market that you are currently investing in have identical yield? They certainly don’t where we are! Sometimes someone may need to sell really quickly so they drop their price (immediate increase in yield), or else the “problem” with the property is offputting to most people (so the vendor has to reduce price) but you can see a quick and innovative solution to it. Also, you may be looking at a 2br cottage which rents for $120/wk, and with small alteration be able to turn a living space into another bedroom and then rent for $160/wk and then onsell. etc etc etc

    Profile photo of buzzwellsbuzzwells
    Participant
    @buzzwells
    Join Date: 2005
    Post Count: 83

    I attended the MasterClass on Sunday. I am also trying to get my head around all of the information. It’s becoming easier with more effort (and the homework).

    Unicorn I think you’re correct with your interpretation on the relationship between yield, rental return percentages, and property prices.

    Describing a property as a problem can be pretty generic these days, so I think investing is not just about looking for a property with a serious problem that would deter the regular buyer, but also doing the number crunching on a property and being able to see the profit in a deal by implementing a strategy.

    Learn, Love, Strive. Make a difference!

    Profile photo of ANUBISANUBIS
    Participant
    @anubis
    Join Date: 2003
    Post Count: 559

    Not always but similar properties of similar value certainly do, and as you know there are many markets within a market. I find most of these techniques from courses overly simplistic yet held up as the holy grail of prop investing.

    Profile photo of UnicornUnicorn
    Member
    @unicorn
    Join Date: 2004
    Post Count: 10

    Hi Anubis

    If the stuff from this seminar was all just too simplified, perhaps you would care to share with us the complicated way in which you have made your millions?

    Many thanks
    Unicorn

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