Purchase or Pass? Analysing a potential Bondi Beach investment by comparing it to recent sale of the neighbouring property
In this week’s Purchase or Pass, Chris Gray is joined by Stuart Waugh from Bell Partners to analyse a potential investment purchase by comparing it to a neighbouring property that sold the month before.
It’s a two-bedroom unit with parking, 7.4 kilometres from the Sydney CBD and under 500 metres to the beach. It has fantastic views of the beach and ocean and as it faces north, would be sunny and light throughout the day. The unit next door sold for $921,000 in May this year, and has been converted into a three-bedroom unit. The view isn’t as good as this unit we’re considering, and it rented for a reported $950 a week, equaling a 5.4% rental yield.
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Chris Gray: So I guess the first question Stuart is, should people looking for investments be comparing it to ones next door? Is that a good way to value a unit?
Stuart Waugh: It is. You do with most assets these days, you purchase it based on other surrounding assets of similar size. Basically, in regard to a property, you do usually compare it to a property close by.
Chris Gray: This is absolutely perfect as it’s next door so it’s really comparable, and also because its been converted. So a lot of people think how do I know if I’m making money on a renovation? Well, just go and compare it to ones that have actually been renovated to see exactly roughly what it’s worth.
Stuart Waugh: That’s exactly right. We’re living in a world these days where everybody says do it yourself, do renovations yourself, try and upgrade the property yourself. So if you can try and see what people have made by doing it themselves, then you can actually take advantage of that yourself.
Chris Gray: So just looking at some basic units, if you looked at $950,000 for a two-bedder, cost maybe $80,000 to renovate, so probably about $1,030,000 you would have paid for three beds. If the other one is renting for $950 and this has better views, then maybe about $1,000 a week or so.
Stuart Waugh: And that’s real. People who are buying these sorts of properties aren’t really looking for it as far as yielding; they’re more looking at it for growth, therefore making capital gain at the end. So we’re not talking about every kind of purchaser here, we’re talking about people that can perhaps have negative gear for a little while and look for the gain at the end.
Chris Gray: So my main worry of this one was a $921,000 for a three bedder getting $950 a week, or now paying $1,030,000 and then maybe getting $1,000 a week. Just hitting over that $1,000,000 mark, that was the thing for me that I wasn’t sure if it was getting a bit expensive. What are your thoughts?
Stuart Waugh: I’m not overly phased by the price as far as being maybe $20,000 or $30,000 more than I thought it was actually going to be purchased for. But in this market where the interest rates are so low and in a market where you’re going to hold this property for a long time, that purchase price isn’t really going to be that significant, as long as you hold it for a long time and ready for the gain at the end.
Chris Gray: Because again you were saying before, a client’s fixed for three years, at how much was it?
Stuart Waugh: At 4.92%. So 4.92% fixed rate for three years is a good rate.
Chris Gray: So certainly if you’re going to maybe over extend or buy something slightly more expensive is maybe that’s a good reason to then fix, at least you know things are capped out for a few years.
Stuart Waugh: I agree, and if you’re buying a property for $950,000 or buying a property for a million bucks, when you apply the interest rate and make your monthly repayments, it’s really not a large difference at all.
Chris Gray: So purchase or pass for you?
Stuart Waugh: I say purchase.
Chris Gray: Ok. Well for me it’s very easy to fall into an emotional purchase when you see a view that good. However, when you analyse the numbers and look at neighbouring properties, sometimes you get a different decision. So for me this one, I’m going to go the other way and pass as it’s over $1,000,000.