Homes vs IPs: What price to pay?

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From: Miakat .


Hi all,

I have a question which came to me as I was reading through the forum today, and one which is close to my heart at the moment.

If a property has the potential for high yields (~15%) is it valid for the vendor to expect a higher price for the property? I mean a house is just a house isn't it? Should I base the price I'm willing to pay on land content and building content alone or should I make some concession for the high yield?

I don't want to pay too much just because I can get great rent, if you know what I mean..

I hope you can help as I'm a little stressed out at the moment.

Thanks all,

Miakat
 
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Reply: 1
From: Michael G


Miakat,

Good question. It's the same thing you have to think about when looking at a DHA (Defense Housing Authority) house. They seem to boost their asking price because of the secure lease. But the problem with this is that after the lease your house is subject to normal market valuations. What happens is that you've buy a more expensive home (which means a bigger mortgage and more costs), and lose captial gain for rent, which buy the way is also eaten up in higher management fees.

My view (and just a personal one, not be taken as advice), is look at what your surrounding market is doing. Is the price compariable to what is around it?, maybe all the houses in that suburb have the same price range due to the rents they attract?. In theory the price should be dictacted by the market, not the purpose of the property.

Here's a what if. What if you buy as a rental and on sell later to an owner occupier?, your sale price is going to be determined by the normal market expectations (as any owner occupier will by it). If this is the case, you've effectively bought just like a DHA home, paying more in capital (and mortgage) for expected rental, losing captial later on due to normal market expectations.

Something to consider...

Regards
Michael

On 5/21/01 5:58:00 PM, Miakat . wrote:
>Hi all,
>
>I have a question which came
>to me as I was reading through
>the forum today, and one which
>is close to my heart at the
>moment.
>
>If a property has the
>potential for high yields
>(~15%) is it valid for the
>vendor to expect a higher
>price for the property? I mean
>a house is just a house isn't
>it? Should I base the price
>I'm willing to pay on land
>content and building content
>alone or should I make some
>concession for the high yield?
>
>I don't want to pay too much
>just because I can get great
>rent, if you know what I
>mean..
>
>I hope you can help as I'm a
>little stressed out at the
>moment.
>
>Thanks all,
>
>Miakat
 
Last edited by a moderator:
Reply: 2
From: Ian Parham


Good Evening Miakat & All
Just on initial reading I guess the answers may be in your own post to some degree.
If the vendor is thinking along these lines, then I would suggest that he/she has factored a 'fudge figure' for potential yield, therefore may well be at top end price. Hard to say!
If you feel the place to be overpriced for 'what it is' then go with a lower bid, or look for another IP perhaps.
If you feel it is the bargain you wish for, would you be prepared to lose it to another bidder if you come in too low?
(Of course you would have targeted the usual objectives of growth, yield, tax effectiveness (if applicable) etc. in your calculations).
What are comparable properties going for?
What sort of yield is attainable from them?
I guess really it comes down to whether or not you need this property in your portfolio. If so, then enter the necessary negotiations on the low side, then be prepared to move up slightly if you need to.
Sounds like the vendor will play the game a bit.
It's you versus him/her!
Good luck!
Cheers Ian
 
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