Feeling a bit used ...

[kph]

Not Necessarily...

I think you will agree with me that 2 otherwise identical properties (whether houses or units) - one being brand new and the other 3 years old - the new property will sell for a premium. That premium will be lost as the property ages (building component depreciates).

Accordingly if you purchase OTP you pay a premium for a new dwelling which is lost over time. That means that, for dollar for dollar, a OTP dwelling (house or unit) is not as good as an investment for CG purposes as say a dwelling that is at least 4 years old.

*Note that I have not taken depreciation tax consequences into account in making that assessment.

You'd be hard pressed to find two otherwise 'identical' properties as you describe so this becomes a moot point, plus there are other factors besides the proported increase in the value of the underlying land which may drive up the price.

Purchasing OTP may not involve paying a 'premium'
It may just be that you are paying todays prices for something that you are taking possession of 'tomorrow' or sometime in the future.
The sales price for an OTP purchase has to reflect a market price today, otherwise it won't sell.

I have to wonder if you have put any of this into practice or is it just opinionated theorising..

kp

 

[JamesGG]

OTP 2 storey townhouse (Brunswick, Mel) paid $224K,1999, now $420K.

Compare ...
3 bed house/land (Blackburn, Mel) paid $134K 1997,now $550K. YUM, YUM !!

Them's the numbers. The established house example above is typical of many in our flock. Valuations for all are official bank val's May 08.
LL

Hiya,

I just ran a quick search on my sales database.

Established house / land in Brunswick (Aug '98 - Aug '99) = $225,000 median.
Established house / land in Brunswick (Aug '07 - Aug '08) = $570,000 median.

Surely statistics make more sense when we're comparing the same suburbs. For those note familiar with Melbourne; Blackburn is some 23km from Melbourne, whilst Brunswick is all of about 5km away from the heart of the city.

Cheers

James.

 

[willair]

.
I wont even bother entering into the amount of difference in short fall or contributions between the Unit and House taking into consideration negative gear.

Please do your homework on each property that you consider - all may not be as it seems and land has very little contribution to the equation unless it is able to be developed.

John,come on you can't be serious with a statement like that, and you should also know any thing in the 5 klm's from CBD south or northside above 900sqm LMR is worth only what the next developer will pay,but if you control any prime development blocks then the sky's the limit in inner Brisbane,what i can't still understand about West End is they have prime riverfront sites and they still build dog boxes,all the old developers that i know and still talk too tell me,you look at the block add 170k persite then add 240k to lock up stage,x by 5 then adds 170 for red tape extras
and then see if there is any money in the deal,and that would be done within 2 minutes on walking on the site..willair..IMHO..

 

[landlubber]

Established house / land in Brunswick (Aug '98 - Aug '99) = $225,000 median.
Established house / land in Brunswick (Aug '07 - Aug '08) = $570,000 median.

Hi James... I agree with your Brunswick stat's. I'm aware that history has shown we'd have been better off buying an established house in Brunswick in 1999 than the new OTP townhouse that I bought. Like most investors, I have developed perfect 20-20 hind-sight over the years !

I used the Blackburn house comparison as it's the "nearest to Mel CBD" house that we have owned for ~10 years...if that makes sense...
LL

 

[boomtown]

KPH

Pick any OTP high density in close to the Brisbane CBD (Vision, Waters Edge. The Mill at Albion) and ill show you an equivalent quality existing property that you can buy for cheaper.

 

[Jon Chown]

Pick any OTP high density in close to the Brisbane CBD (Vision, Waters Edge. The Mill at Albion) and ill show you an equivalent quality existing property that you can buy for cheaper.

My goodness Boomtown, I sure hope so. I've got several mid 70's units that you can buy for around $250K and I believe that they were of equivalent quality when they were first built.

Sorry mate - just couldn't resist nitpicking.

Thank goodness that some people still buy OTP as it seems that Banks are now demanding around 50% presales before funding the Developers. Probably a good thing as supply should be governed by demand more accurately and we are less likely to get an oversupply like we did in the mid 90's.

KPH is quite correct with these statements

Purchasing OTP may not involve paying a 'premium'
It may just be that you are paying todays prices for something that you are taking possession of 'tomorrow' or sometime in the future.
The sales price for an OTP purchase has to reflect a market price today, otherwise it won't sell.

I know many people who purchase off the plan simply to take advantage of a quick profit. They do do their homework though and generally know what and when to purchase.

 

[soyabean]

My goodness Boomtown, I sure hope so. I've got several mid 70's units that you can buy for around $250K and I believe that they were of equivalent quality when they were first built.

Where are they Jon ? Are they 2 bed and close to Bris CBD ? I could not find them on your "for sale" list.

 

[landlubber]

Can't let that one go unchallenged...

I know many people who purchase off the plan simply to take advantage of a quick profit.

Woooo Jono ...there's a statement of quite some REA bravado! Please qualify it with ... 'in a bull market maybe' ...'if they buy RIGHT maybe' ...Did you ever hear of a guy called Henry Kaye? He was singing much the same tune in Melbourne. Unfortunately many of his clients found out VERY differently in practice.... There's many,many investors that bought Mel CBD hi-rise units and/or docklands apartments new OTP who, despite a HUGE bull market in Mel. property over the last 10 years, have been negative equity for all that time ...despite the assurances of the "experts" that CG was assured in "heaps". Turned out to be crap advice of the highest order. During the same period ALMOST ALL OTHER MELBOURNE RESI. PROPERTY increased in value !!! Scary stuff that OTP.

They do do their homework though and generally know what and when to purchase.

If you do all that DD in earnest, AND you're a serious IP investor, then the LAST thing you buy is NEW OTP.
LL

 

[boomtown]

KPH is quite correct with these statements


I know many people who purchase off the plan simply to take advantage of a quick profit. They do do their homework though and generally know what and when to purchase.

The last time I looked at Flow (about 6 months ago) - the investors that bought in there would have been bleeding hard based on the vacancy rate and low low returns. Competing with the developer to rent out units can't be much fun. I dont think Koko is going so crash hot either - last time I drove past they have a massive fire sale banner up. You wouldnt be too happy if you dropped 1.6 million on a river home and they had a "everything must go" banner hanging above your roof.

I suppose buying into Flow or Koko shows that you havent done your homework? Do you think that the investors buying into Waters Edge know that Pradella has another 550 units scheduled to go up behind them? That wasn't written in the brochure I picked up nor - how odd - Pradella must have left that out by mistake!

But Im willing to be demonstrated wrong - are you able to show me any new units with a carspace on a long term lease with a realistic gross yield of 6% or higher?

 

[boomtown]

Just picking a completely random example - theres hundreds more out there:

Tempo 99/16 Donkin Str.

Asking price: $590,000
http://www.homehound.com.au/listing/index.php?id=5059156

PDS live tells me it was purchased on 01/11/2005 for $519,000.

Currently rented at $495 per week until 25/10/2008.

So thats a 4.9% gross yield on historic purchase price and a 4.3% gross yield on asking price. I dont know the body corps but from comparable properties I would guess that property would be netting low 3%. In terms of capital gains the property has increased in value 13% since January 2005 (assuming they can sell at the asking price which may be a big ask in this market).

By comparison much of the rest of Brisbane went up 23% in 2007 alone - never mind 2005 and 2006.

The owner has probably gone backwards in nominal terms after interest expense and body corps without even taking into account opportunity cost or deflation on that $519k.

Thats a truly awful deal.

 

[Jon Chown]

Buying any investment property can be fraught with danger if you don’t know or understand what you are doing. In order to better explain my statements, I should first advise that I do not suggest that speculative investment is easy, nor do I recommend this type of investing to my Clients. Long term investing is far safer for most people as the years have a way of smoothing out the highs and lows and providing a better average growth rate. Speculative investments (whether they be OTP purchasers or renovators or even Splitters and Developments) require a substantial understanding of the market trends, building costs, future value, ins and outs costs, Tax and GST implications, demand or supply of the product and much more in order to make a dollar over a short term.

This is not to say that many people do not make money from pursuing this form of investment and conversely I am sure that many people get it wrong and loose on these transactions. The thing that we must be mindful about is not to make a negative blanket statement because we may have had a bad experience in this area.

I am equally sure that I will not be able to convince some here that OTP investments can be beneficial and profitable to some people – And that’s OK, they should stick to what they feel comfortable with but please do not attempt to stop other people who may be more informed from having a go.

Boomtown says

Tempo 99/16 Donkin Str.

Asking price: $590,000
http://www.homehound.com.au/listing/...php?id=5059156

PDS live tells me it was purchased on 01/11/2005 for $519,000.

The only problem with this statement is that while the Contract date was 01/11/2005 the Purchaser did not Settle (pay any money) till settlement date which was 14/09/2007. This was an OTP purchase. In saying that, I tend to agree that for my mind a $70K gross profit on an outlay of $519K (plus costs) is not necessarily what I would consider a good investment. That’s if it does in fact sell for $590K.

In saying that and as another quick example try this one.
Building is Mon Reive in Kangaroo Point – Unit purchased OTP and Settled 22/10/2004 for $679K Sold 12/12 2005 $865K Gross profit of $185K – not bad for 14 months investment.

We could go on and on finding examples of why it's a good or bad investment strategy, however I suggest that we let those who decide that it is what they want to do - have a go.

 

[kph]

The last time I looked at Flow (about 6 months ago) - the investors that bought in there would have been bleeding hard based on the vacancy rate and low low returns. Competing with the developer to rent out units can't be much fun. I dont think Koko is going so crash hot either - last time I drove past they have a massive fire sale banner up. You wouldnt be too happy if you dropped 1.6 million on a river home and they had a "everything must go" banner hanging above your roof.
Do you think that the investors buying into Waters Edge know that Pradella has another 550 units scheduled to go up behind them? That wasn't written in the brochure I picked up nor - how odd - Pradella must have left that out by mistake!

I don't know the Brisbane apartment market but when I was over there 2 yrs ago we were hearing of this potential overhang that was hitting the market.

The problem for the developer and the lender is that once you push the Go button its very hard to stop. This coupled to the long lead time before the finished product hits the market, makes it a potential dangerous pasttime, this developing game.
Lots can change in the 18 to 24 months between start and finish, as has just been demonstrated with the sub prime crisis affecting economies across the globe.
It wasn't predicted and not too many planned for it.
Now, developers and lenders have to fact the music.
One option is to cut your losses and sell the balance stock at any price as long as you can repay the outstanding debt to the lender.
Better to come out even, or a slight loss vs going under.
Survive and live to fight another day, as it were.

I guess the difference with the Perth apartment scene is that you are not getting so many LARGE developments. Most seem to be smaller in number so the overhang is not so prominent.
Having said that, the reports from agents is that the market here has also stalled, but there is confidence it will come back ( eventually?)

kp

 

[boomtown]

Jon

I neglected to consider that PDS live would show the contract date rather than settlement date. On that basis the Tempo example is much better than I calculated. Still a probable loss after stamp duty, agents fees, holding costs etc but the vendor can't expect much after only hanging onto the property for such a short period.

 

[Bill.L]

Hi all,

Jon,

That last post of yours annoyed me. It was full of motherhood type statements about property investment. This thread was started by someone who made what many investors here would say are classic property investment errors. Your statements are along the lines of the bleeding obvious for anyone who has spent a bit of time educating themselves by reading many threads here (at Somersoft).

Of the properties that you are highlighting, how many of them are yours??? as in you own/owned them.

Are you a property investor?? What is your history with property, apart from selling it????

Here is a simple question, In your opinion does OTP property have better cap growth than existing property of the same type in the same area on average???

bye

 

[Jon Chown]

Well excuse me Bill for not assuming that everyone who posts here is not as smart as you obviously are and I’m truly sorry that my post offended you.

This thread was started by someone who made what many investors here would say are classic property investment errors.

Let me get this right. The original post by Jodie701 was to the effect that she was having a bit of buyer remorse because she felt that she should have asked the Developer for a 10% discount on purchase price on a 2x2 bedroom unit that she had just purchased in Parramatta. Later we discover that the contract price for this purchase was $417,500. (Just to clarify a bit further, I had already looked up this development on a link that Jodie had provided in another post elsewhere and am familiar with the floor plan, size of development and appearance of building).
So to take Jodie’s purchase a little further and in context with her question should she have offered the Developer/Agent $375,750 for the unit or did she buy right at $417,500. So that this question can be answered, we must first have an understanding as to how much it costs to produce a 2 x 2 unit and I am sure that if I were to ask any Builder/Developers here on this site if they could do this Development today for the asking price (and make a profit), I would get a resounding NO. I know this because I have just finished costing a similar project and our average sale price has to be in the high $400’s or it is just not viable.

As you rightly point out, most of the posts were of a negative vain as to how she should not have purchased OTP as they are not a good investment. From there I merely provided a slightly different slant to OTP purchases which I have the benefit of knowledge from my observations. I did not say that they were the best form of investment but nor did I say that they were lousy like some others here. Does the fact that I don’t agree with some others mean that I am wrong?

Do I believe that Jodie has made a mistake? Not on your life - but that's just me and I'm an Agent so what do I know.

Of the properties that you are highlighting, how many of them are yours??? as in you own/owned them.

None, these were examples of OTP sales and I do not have any in my portfolio.

Are you a property investor?? What is your history with property, apart from selling it????

Yes I am a property investor and I have made my own mistakes over the years. I invest in bottom end units and townhouses as holders. I have 24 years of experience and in property sales spanning 4 decades and have survived 5 property busts of various degrees. Does this help? Who knows.

Here is a simple question, In your opinion does OTP property have better cap growth than existing property of the same type in the same area on average???

Silly question – They have the same growth rate on average.

Again Bill, I apologize if my writing style offends you – I am who I am.

 

[boomtown]

So to take Jodie’s purchase a little further and in context with her question should she have offered the Developer/Agent $375,750 for the unit or did she buy right at $417,500. So that this question can be answered, we must first have an understanding as to how much it costs to produce a 2 x 2 unit and I am sure that if I were to ask any Builder/Developers here on this site if they could do this Development today for the asking price (and make a profit), I would get a resounding NO. I know this because I have just finished costing a similar project and our average sale price has to be in the high $400’s or it is just not viable.

Jon

There is a fundamental flaw with your reasoning.

Building costs may have risen dramatically so that the cost of building new units is well above the purchase cost of existing units (even if the existing units are better built, larger, in a better location and only 4 years old).

To purchase an inferior unit in an inferior location at a significantly higher price just because it cost more to build is a bit silly. Simply looking at building cost without taking into consideration the broader market is not a wise strategy.

 

[wylie]

Greenslopes - 3 bedroom Colonial home on 567m2 land purchased 25/7/03 $360,000 sold 20/6/08 $415,000. Gain $55,000 or 3% per year. Rent $350 week.

I am curious as to why the house in Greenslopes you mention didn't increase in value very much over the five years? During that time Greenslopes prices rose considerably more than the house in question.

The only thing I can think of is that it may be near the Greenslopes Private Hospital with all the associated congestion and parking issues, and possibly this held it back. Did you consider it a good price when they bought it? Do you think they paid too much? Did they sell too cheaply?

Very curious because it is my area and it just seems odd.

 

[Jon Chown]

There is a fundamental flaw with your reasoning.

Building costs may have risen dramatically so that the cost of building new units is well above the purchase cost of existing units (even if the existing units are better built, larger, in a better location and only 4 years old).

To purchase an inferior unit in an inferior location at a significantly higher price just because it cost more to build is a bit silly. Simply looking at building cost without taking into consideration the broader market is not a wise strategy.

Boomtown, I agree completly with your statements and although not familiar with Parramatta it would appear after a quick glance on Realestate.com that a four year old unit would be somewhere in the high $300's. Perhaps someone with more local knowledge could comment. I am not sure that there is likely to be a great deal of difference in size (given that most 2 x 2's are around 76m2)

I agree that location should be on top of the list of desirable attributes.

 

[Jon Chown]

Hi Wylie,

I am curious as to why the house in Greenslopes you mention didn't increase in value very much over the five years? During that time Greenslopes prices rose considerably more than the house in question.

The only thing I can think of is that it may be near the Greenslopes Private Hospital with all the associated congestion and parking issues, and possibly this held it back. Did you consider it a good price when they bought it? Do you think they paid too much? Did they sell too cheaply?

Very curious because it is my area and it just seems odd.

Fear not your properties are much better than this one even though it is just around the corner from yours. (You can see it on my website).

Did they pay too much? 2003 was top of the last boom and in hindsight perhaps a little.

Did they sell too cheaply? Only they can answer that but we had three contracts on the property and two fell over due to building inspection faults.

The bottom line is that after they bought the property, they never went back to inspect and white ants got in as well as a fungal rot in the roof bearers. The eventual purchaser was an investor/renovator who was going to do an extensive make over. House had excellent street appeal.

Another lesson for people here is that the property was sold with Tenants who still had 6 months to go on their lease had a big dog and were not the tidiest in presentation. This put a lot of first home buyers off.

 

[boomtown]

I dont know the Parramatta market so can't comment.