What’s going on guys Its Jordan de Jong here and welcome to my final blog of the three-part series on how to find and A-Grade Market, A-Grade Area and A-Grade Property, today I want to talk about what I look out for when trying to find an A-Grade Property. If you haven’t already watched the previous two blogs, I would highly recommend going to watch them first as finding a specific property is really the final piece of the puzzle. Property commentators often say that location does 80% of the heavy lifting where the actual property does the remaining 20%, so being able to identify the right times in a property market to buy, and what to look out for when it comes to location is more important than the specifics of a property. On paper, there are two main areas that investors generally look out for, one is capital growth, which is how much value to property increase by over time, the second is high rental yields, which means you are getting paid a high rental amount compared to the price of the property. These two often don’t come packaged together, because rental rates generally lag behind property prices by 6 months or more, rental yields are generally lower on properties that grow quickly. To calculate the rental yield, you divide the total annual rental income by the value of the property, So let’s say a $500,000 property is currently being rented out on a 4% rental yield, that’s $20,000 PA. Over the next two years the property grows at 9% PA to $594,050 and the rental manager hasn’t contacted the tenants in over two years because everything seems to be going smoothly, so the property is still being rented out at $20,000 PA, now the rental yield would be 3.36%. As you can see, this is how the rental yield lags, because rental contacts are generally 12 months or longer and some property managers would rather keep good tenants in the property at a lower rate, hence why it’s hard to get a high rental yield property in a high capital growth area. However, it is possible to get a hold of these “Unicorn” properties, they call it unicorn because they are very rare, where there’s high historical capital growth, high rental yields and potential to manufacture equity, and investors generally take a snapshot in time to align these three qualities. The problem with looking at a property in a snapshot of time is that it’s not sustainable for a long period, for example you may be able to take a snapshot of a high rental yield now, but as demonstrated before, this can easily deteriorate over time. Also, say an area has gone through three years of higher than average capital growth, some may deem this as a high historical capital growth area to invest because of the recent growth, but due to market cycles, it could mean that the property is overvalued and the price could remain flat over the next couple of years to even out. So, realistically these unicorn properties all come down to whoever is interoperating the data, For me personally, due the ridiculous costs of buying and selling a property, I always take a minimum 10-year view when analysing a property and try to find a balance between capital growth and rental yields. Growing up in Greater Western Sydney there was plenty of land available, people owned aches and majority of houses were built on huge blocks, so when I first heard the term land appreciates in value while buildings depreciated in value, I put a big emphasis on having a large block of land. However, moving to Melbourne I’ve realised that although the statement still holds true, it doesn’t solely refer to land size, but more land value, living much closer to the city in Melbourne Its obvious that tiny blocks of land on the titles of Art-Deco apartments are much more valuable than huge blocks of land 20KM away from the CBD. Land banking is the counter here, and if you can manage to land bank over time through gentrification and re-zoning, the value of the land should increase dramatically, this is also what we refer to as generational wealth, where it might take multiple decades to see substantial growth. As a general rule of thumb, for houses I look for a land component that takes up at least 60-70% of the value, and for units 30-40%. If your loving this content make sure you smash the like button as it seriously helps out with the YouTube Algorithm. Dwelling type and size is also a key factor here, its all well and good to have low vacancy rates, but what if the percentage of vacancy is mostly associated with 1 bedroom apartments. I wouldn’t want to be stuck paying the mortgage on a property that was sitting their vacant, so once I have the area down packed, I look for the dwelling types in the middle range of the property bell curve, preventing me from buying an apartment in an area where the usual block size is 600m2 and properties have 3-4 bedrooms. On the flip side, I wouldn’t want to overcapitalize by buying 5 bedroom house with a media room that never gets used and only fetches a tiny margin extra in rent per month compared to a 3 bedroom on a smaller block in the same area. In most cases, I would buy an older house over brand new, it’s easy for sales people to sell you on the depreciation of a brand new house, but why would you spend a dollar to only get 30 cents back? You may be paying 10,000’s extra for a new house now compared to a similar older house in the same street, but in 30 year’s time they will both seem old and will be much closer in price. Remember that materials depreciate over time and new materials de-value the fastest, its like driving a brand new car out of the dealership and instantly loosing $10,000, once an oven or cook top has been used, its hard to sell it for as much as a brand new one. Supply and demand come in many forms, an area might be overflowing with properties for sale with demand not meeting the supply levels, however if something unique that’s an investment grade property comes onto the market, then a lot of the limited available demand might fix their attention on this one unique property. I would look for properties with character or some uniqueness within the area, basically looking for scarcity or a rare quality, this scales down to even the basic features such as having a north facing block or quick access to the local parks. The third piece of the formula to a unicorn property is being able to manufacture equity, this can be done any many different forms, however, can only be executed once each in a short time period. Manufacturing equity is as simple as spending $5,000 on a renovation and increasing the value of a property by $10,000, and this is my general rule of thumb, for every $1 spent, I should be getting $2 back. So, identify they things that significantly increase the value of a property for the smallest amount of money, sometimes a new paint job can make a place feel brand new, or turning a large living area into a 3rd bedroom could open up flood gates for new types of buyers. When I say can only be executed once, and example of this would be adding a granny flat, you cant do that twice, or spending $5,000 on a paint job, you can only really repeat this every 5-10 years so that is has a dramatic effect on the property price. Now let’s go into the bare minimum of checks I would do before signing any legal contracts, this list isn’t suited to any individual property or state so please investigate further for your own due diligence checks. Building and pest inspections are so critical and are often overlooked because of the upfront cost, but really, they could save you $100,000’s of dollars if something was wrong with the foundation of the building or had cracked water pipes. Always make sure that you walk through the dwelling with the inspector as the final report can often seem like the entire house is going to fall down, anything they note down, ask them about, and you’ll quickly realise what a minor issue is compared to a major issue that may stop you from buying the property altogether. Ensure you get all the legal documents checked from a solicitor or conveyancer, they’ll be able to ensure you are buying what you think you are buying, and that there are no hidden clauses or outstanding issues that may catch you out. If you are buying brand new, do some thorough research on the builder and developer, search online for reviews, try and find some previous projects, and at the very extreme level even get in contact with the new owners of those projects to see if they had any issues or outstanding maintenance items. If I am buying in a strata building, I do a thorough check of the strata meeting minutes and the full strata report, looking out for any hidden fees, upcoming additional levies or complaints and difficulties from the existing residents. I know I’ve talked about time on market in the previous blog, but I would compare the specific properties time on market to the areas average. Trying to identify if its been to auction already and passed in, or had any price drops since its been on the market and finding out why, it could have just been overpriced to start with. Finally I would ask for the reason of sale, if it is a rushed sale such as the owners are getting divorced or have recently passed away it may be a good way to get a quick easy sale done, obviously don’t take full advantage of the owners as they are already going through a hard time. I want to know what other things you guys look out for when looking for an investment property, leave them down in the comment section below. Ultimately for me personally I want to buy a property for its value rather than its price, I would be happy to pay market value for A-investment grade property than pay under market value for a B or C grade property. As always, seek your own professional financial, legal & property investment advice for your current situation, these blogs are just my opinion and should never be considered personal financial advice. Until next time, happy house hunting.

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