Any investing is a game of risk versus reward. Horse-betting is a form of investing and punters use a form-guide to do the best due diligence they can to determine if the odds about a particular runner are a true reflection of their winning chances. If the punter determines that a horse has a very good chance of winning but that horse's odds indicate it doesn't then the punter has concluded that the majority of other punters are wrong. In that case the punter will perceive that there is value in investing some money on that horse.
As property investors we are also looking to maximise our return by first determining all the risks associated with a particular purchase and then estimating whether a listed sale price is considered fair value against those risks. If not, we either pass it up or try and negotiate the price down.
Over the years, "buying new or old" has been a recurring issue because there are risk issues like the condition of the property which is of more concern in an old property than in a new property. However, new properties haven't tested the market and so price and quality of construction are important issues. Other issues for new-builds are type of dwelling and whether there will be a resale market or rental market for the new-build at this location. If you have two identical dwelling types for sale next to each other in the same street, one is 15 years old and the other is new, how would you determine which property to buy as an investment? Generally, the new property would be more expensive, but that would be offset by loads of tax deductions, usually a higher rent and little or no maintenance costs in the first few years. So how do you determine which property is the better investment?
To complicate matters further, how would you determine the best investment from a selection of different property types in different locations? Here is a 'best buy' list for home buyers in south-east Queensland I found on a RE agent website. The list was done in Feb 2001.
freehold riverfront and beachfront properties;
freehold Moreton Bay-front land;
hilltop real estate with city or water views;
houses on large homesites in the inner suburbs;
well-located units/townhouses in well-designed and maintained buildings with river or city views;
residential redevelopment land in the inner suburbs; and
acreage property close to the city.
As a home buyer or investor, what due diligence would need to be performed to choose between properties that had vastly different characteristics?
If you were desparate to buy now then your budget and current borrowing capacity might be a major consideration and therefore the purchase price could limit your options. But what if your budget and borrowing capacity allowed for a range of price options? Would you buy one expensive property or two at half the cost? If you buy one property in an expensive area you may be able to attract good quality tenants. On the other hand, if you decide to buy two at half price each in a cheaper area you may have tenant troubles in the future. If you were in no hurry to buy then you could afford the time to be picky about what you bought. Perhaps you have the time to attend many auctions before finally securing something. So time is another factor to consider.
There are many other factors to consider but at the end of the day, as an investor, you are seeking to buy an investment which you can hold long term, if necessary, and will be able to sleep comfortably knowing that it has good tenants in, is professionally managed, is insured, has low maintenance, has good long term growth prospects and has wide resale appeal. Careful due diligence should give you that happy scenario. Extreme due diligence which involves actually studying a market in a specific geographical area as well as, if not better, than the local RE agent, should assist in getting a bargain just like the punter I spoke of earlier. But how much time have you got to become an expert in a specific area? If you don't become an expert then you can still buy good investments but it is doubtful you will buy them at bargain prices because the expert will have recognised the bargain earlier and already bought it.