"You make your profit when you buy, not when you sell"

[Perp]

Thank you all for your interesting replies. I'm rapt to see how many of my "favouritest" posters have come out to respond to this thread.

I think it's interesting that this saying which is often stated as an obvious truth (despite craigb not having heard it before ), there seem to be several different takes on what it actually means, which is what I suspected and was wanting to explore...

The various meanings that people seem to have read into this saying seem to include:

1. Buy below market value to obtain instant equity
   
2. Have a strategy in mind for the property that means you know where your profit is coming from, regardless of market activity (ie development/reno opportunity)
   
3. It's important to be IN the market
   
4. The most important thing is selecting the right property to buy (ie importance of location and other fundamentals)

Of course, there's some truth in the saying - depending on what you think it IS actually saying! - and that's why it's stuck around. Like GoAnna, I learn the most when I question conventional wisdom. The result of such questioning is that you either:

1. gain insight into why it's true,
   
2. figure out when it's true and when you should ignore it, or
   
3. decide to discard it from your own set of guiding principles.

For me, I definitely like the second interpretation - that you should know how this property is going to make you a profit when you buy. Like GoAnna (again!), I don't think that buying below market value is essential. Nice if you can get it, but far more important to buy the property that best fits your investment objectives.

Thanks for the interesting discussion. I look forward to further contributions.

 

[HandyAndy888]

Yes, you can make a profit anytime during the process, but if you bought exceptionally well during the 'buy' phase, then whatever profits you may gain on top can only make you richer...

See, this I can't agree with.

Lets use an example...

Let's say for arguments sake the suburb average is 400K.

Deal 1. I get a great deal and buy for 350K....whoohoo 50K instant profit....not bad.
Deal 2. I buy for 400K. No instant profit.

10 years down the track, the value has doubled.
Deal 1: 800K
Deal 2: 800K

Profit/equity???

Deal 1: 450K
Deal 2: 400K

120% profit, over 100% profit, so over the time of the ownership, you have gained an extra 2% pa.

The problem I see is that often people are "hanging out" for such a 350K deal, it rarely comes and you miss out on Deal 2.

 

[redwing]

Perhaps a more apt phrase, would be "locking in profits when you buy". This is achieved by purchasing below market value as had been outlined above and hence no matter the market, there is an equity buffer locked in to ride any negative parts of the cycle. Further value adding by way of DA, Planning Permits, Subdivision ,etc., adds to the bottom line.

I like Players concept and think of it as locking in the profit on purchase, it’s a great phrase to remind you of the importance of the negotiation process as well and the need to “buy well” and not overpay, or get caught up in the emotional side of the purchase, you make your profits (realised or via equity access) based on what you pay for the property at purchase?

I had heard the phrase as “You make your profit when you buy and you get paid when you sell”.

Also “buy at wholesale and sell at retail”

How about “Buy Low-Sell High”

Lines of Credit and the top-up process make it easier nowadays to lock in the profits though and something we’ve done in the boom phase

 

[redwing]

See, this I can't agree with.

Lets use an example...

Let's say for arguments sake the suburb average is 400K.

Deal 1. I get a great deal and buy for 350K....whoohoo 50K instant profit....not bad.
Deal 2. I buy for 400K. No instant profit.

10 years down the track, the value has doubled.
Deal 1: 800K
Deal 2: 800K

Profit/equity???

Deal 1: 450K
Deal 2: 400K

120% profit, over 100% profit, so over the time of the ownership, you have gained an extra 2% pa.

The problem I see is that often people are "hanging out" for such a 350K deal, it rarely comes and you miss out on Deal 2.

How much did you put into Deal 1 and Deal 2 and what are the returns on that investment?

 

[HandyAndy888]

How much did you put into Deal 1 and Deal 2 and what are the returns on that investment?

I had assumed everything else being identical, no renos, same/similar holding costs...

 

[want2bewealthy]

True Buzz, but.... I would try my darn hardest not to sell, I'd much prefer to refinance, thus never sell any asset, as long as its performing well, which I try to achieve with every purchase to limit my speculation.

Property has such a high cost to enter and exit from so don't see selling as a good idea to purchase another because you loose so much. but if the new property might outperform the last? you've still lost alot of money by selling, hence why I'd refinance for the new purchase , keep it, and in doing so, keep the growth from a larger base of assets.

Depends on the opportunity cost of not selling. Never say never.

What if you realise there will be an or other exceptional investing opportunities but cannot raise the funds otherwise.

Like a rose bush, sometimes you need to prune back for future healthy growth

 

[Maverick86]

The saying of 'making your profit when you buy' has always been to me 'buying at below market value'. Now I'm extremely new to property investing and I'd like someone to clarify with me how you do that.

Is it a matter of looking at past sales of a comparable property (eg comparing all 2 bedroom houses), then look for an advertised property below the median selling price? Also, must you compare right down to the street level (ie buying the worst house on the best street)?

I've just finished reading '7 steps to wealth' and it talks about an example where one house was bought at $400,000, while John Fitzgerald bought another house on the same street for $300,000 (or something like that). Is this what I'm aiming to do?

I've been looking at the local newspapers weekly to look at the sales history and also API. Is the strategy of looking for suburbs with >8% for 10 year annual growth rate a viable strategy? Or does past history mean nothing?

Thanks for your help!

 

[redwing]

I had assumed everything else being identical, no renos, same/similar holding costs...

Hi HandyAndy, sorry I wasn't clear

The deposit required for the $350,000 loan compared to the deposit for the $400,000 loan would be less?

The return would also have to be based on what you put into the deal (deposit) and the % return on that as well, would it not over the 10 years?

 

[JamesGG]

Why? you convert an appreciating asset that sports increasing rents on purchase price over time, into after tax money by selling and lower your asset base.

Thats why not.

I'm aware that you're probarbly just taking the piss though huh

Not so much taking the piss, really, but looking to see why you like the strategy that you do. I understand a little more now and can appreciate your other posts better in context.

Personally, I am a great fan of migrating my money to where the returns will be better than if I had left it where it was. Even with the entry / exit costs, I have seen time and time again that if the investor knows what they are doing, better results come much quicker by being proactive. Including, if need be, the sale of a property to inject cash into a better investment.

 

[Dazz]

Paying market is not the greatest sin. Sometimes it's the smartest move you can make.

Agreed - great point. We have followed this strategy over the last few years. It has meant we have been able to purchase the props we wanted, rather than the ones the desparate Vendors wanted to offload. It's served us well.

 

[Dazz]

Like GoAnna, I learn the most when I question conventional wisdom.....a set of guiding principles.

ozperp, your question in this thread is simply one of these 'conventional wisdoms'. A much larger topic would be detailing what you have said in the above quote.

My question on the subject would be ;

"At what point do you abandon these common held wisdoms and principles because they no longer are either suitable or applicable."

To my mind, that is what makes this journey interesting - because the road we travel down changes along the way.....just as the vehicles we use to travel down the road.

 

[Perp]

To my mind, that is what makes this journey interesting - because the road we travel down changes along the way.....just as the vehicles we use to travel down the road.

Yes, just as TIC has been such a valuable vehicle for you to this point, there may come a time when you feel confident enough to buy a townhouse on your own, without all the free support and assistance of TIC's advisors.

Who knows? One day, Dazz, you may even aspire to buy a small shop, or rent out the storage shed at the back of one of your properties to a business. Probably not on your own, and not until you get a few more resi transactions under your belt, but maybe one day...

 

[redwing]

Yes, just as TIC has been such a valuable vehicle for you to this point, there may come a time when you feel confident enough to buy a townhouse on your own, without all the free support and assistance of TIC's advisors.

Who knows? One day, Dazz, you may even aspire to buy a small shop, or rent out the storage shed at the back of one of your properties to a business. Probably not on your own, and not until you get a few more resi transactions under your belt, but maybe one day...

Methinks more than a few people here are taking the .... today

 

[Dazz]

there may come a time when you feel confident enough to buy a townhouse on your own

One thing at a time Tracey. I'm working my way up the TIC graduation scale. In a couple of years time with studious saving I may have the deposit together for my very first townhouse. But, as was pointed out recently, go-slow wealth method is far safer and manageable.

I don't like these cowboys racing out after only 5 years and buying townhouses on their own.

 

[LynnH]

Methinks more than a few people here are taking the .... today

And I thought I was the only one thinking that, redwing .....

Cheers
LynnH

 

[Player]

Another facet to making your profit when you buy.......or from my perspective "locking in your profit when you buy", is the terms of the deal.

In this market (used generically and not in reference to some of the sectors/areas that are still rising), the terms of the deal are just as, if not more, impacting upon the profit notion in this financial climate. It is not merely price that "locks in one's profit."

There are vendors out there that are not selling because they want to; but because they have to. On that basis looking for properties that a vendor not longer wants, as distinct to any old property that is merely "for sale", favours satisfying the notion of profiting when you buy. Terms such as vendor finance, delayed settlements whilst value is added, hasty settlements with exponetial reduction in contract price and many other variations on this theme can, depending on the equity position of the buyer, snare "bargains".

I always try to ascertain the vendor's motivation. The more desperate that motivation, the more options one has to purchase under terms biased to the notion of profiting when you buy. This is not always easy as the agent may or may not be willing to share such information, or if in a "cheaper high volume turnover suburb" may not have the time to entertain such tactics. If not, that's OK.....next. It may mean that we have to churn through a large number of properties, however the pay-back can be great.

I have had cause to be sniffing around just such a "cheap high turnover" suburb recently. I put my foot on a property and tied it up on building and pest DD and ended up letting it go on the basis of building report. For me it is a future development site, however that's in about 10 years time (it will be a SMSF purchase), hence I was not willing to allocate two years worth of rental income on the repairs necessary to remedy.

Am currently waiting for the agent to condition down the expectations of the vendor and fortunately the time clock is ticking as the agent shall soon lose exclusivity.....hence his motivation shall also become more intense. Also working in my favour is the fact that prices have softened in that area over the past 4-5 weeks and it was first advertised at a ridiculous price; hence putting people off and they've relisted two weeks ago on rea.com.au to re-set the number of views/hits counter.

I am not looking to take advatntage of them, as no one is forcing them to sell, however the agent has informed me that such is becoming more desperate. If my ridiculous (now verbal) offer is considered tempting even within 5 % of such, I will then start the negotiations for delayed payment of a "chunk" of the purchase price. The property is handy for me to have, but not desperately so. I am aware of a few more snippets of info that I cannot share here, however at the price, if they walk with a ceratin amount they'll be happy.....so cheap (read no cost) vendor financing for a couple of years may be achievable.

What I'm trying to get at (and I apologise if i'm articulating it in a long winded manner), is that terms, and not price alone, can enable one to "profit when they buy" and lock in the upside as the capital growth tide will again start to rise all ships.

 

[Gools]

120% profit, over 100% profit, so over the time of the ownership, you have gained an extra 2% pa.

The problem I see is that often people are "hanging out" for such a 350K deal, it rarely comes and you miss out on Deal 2.

HA, there is more to it than straight profit. What about the holding costs of the extra $50k from the start? So you're looking at $3k per year over the 10 years as well as the $50k less capital gain. Starts to add up in the end. Deal 1 is much better than Deal 2.

Gools

 

[Perp]

terms, and not price alone, can enable one to "profit when they buy"

I couldn't agree more. (Player, we're making a habit of this! )

Just as with mortgage finance, interest rate is not the only consideration, I heartily agree that terms can be as significant (or even more significant) than price with respect to a property deal.

 

[HandyAndy888]

HA, there is more to it than straight profit. What about the holding costs of the extra $50k from the start? So you're looking at $3k per year over the 10 years as well as the $50k less capital gain. Starts to add up in the end. Deal 1 is much better than Deal 2.

Gools

Agreed. My point is that sometimes people are "hanging" for that sweet once-in-a-lifetime deal and it never comes. This means they miss out on Deal 2.

But yes, for certain, there is some extra profit to make at purchase. 80K is 80K...