When it comes to buying property, be the "Frog"

Housing Market Written by John Bolton, Nov 19 2012

Put simply, be patient! Right now I won't be the only investor struggling to find good property deals in Auckland. Up until about 6 months ago it was easy and my problem was convincing the bank to give me more money! There were still plenty of bargains to be had (and I'm not talking South Auckland crap.) I managed to pick up five properties earlier this year. Now, as I hurtle along at break neck speed, all of them look like fantastic buys. 2012 has been a great year for property. However, most of it was banked early on when only the brave or stupid were buying with any sort of ferocity. My dilemma now, is that I have sold one of my 2012 properties already and the other two trades will be sold in the next few months. I am going to struggle to replace them.

The market is tight with more investors out there looking for deals. Even crap houses are selling at a marked premium. Alas, there is always someone else prepared to pay more than me. Actually, way more than me! This is where patience becomes important. It pays to stick to the game plan. Not to get caught up in market hype, or worse still, not to believe your own internal rationalisations about how property always goes up. (Have you noticed that most serious investors are only a few french fries short of institutional help!)

Hey - just about everyone buys the notion there is a housing crisis in Auckland. This is helping boost confidence and urgency. The urgency, I think, is driven more by fear than greed. I find people are genuinely concerned about getting priced out of the market. In my opinion, unlike some commentators I don’t for one minute believe that prices will double in the next 5 years. Yes, I buy into the shortage of property in Auckland. To me it’s obvious. You cannot have a growing population, minimal building activity, and leaky buildings and not have a problem.

I think most of the increase has flowed through to prices already. Emerging suburbs will increase further from older rundown stock selling cheap, then getting renovated and resold at much higher prices, lifting the average sale price. Nonetheless, there is still the risk of an offshore shock killing consumer confidence overnight. Shortage or no shortage, buying property is a confidence game.  The sort of craziness we see at auctions relies on having at least one “nutter” in the room who has lost their perspective on price. What if there is no nutter? What happens at the auction then? What if everyone has had a dose of reality? What if Australia and NZ went back into recession?

As it stands I'm still looking to buy property, but also working hard to not be reckless. I won't run out and buy for the sake of buying. A property has to stack up. My basic rule is a yield of 6.00% and buying under market value by at least 10%. There needs to be enough fat in a deal to exit quickly and not panic if the market turns to shit. Having an exit strategy is sensible. It's also self-preservation as the wife would kill me if I lost her house! Whatever way you look at it, you cannot embrace the current market with blind faith. I'm like a frog. Content just sitting still, watching the market and waiting. At some point a juicy fly will go by and whack, next deal done.

There is no point expending energy and using up valuable working capital chasing average deals. Average deals stop you from doing great deals. And although it feels overly hard, even in a hot market there will be troughs, and out of those dips will come opportunities. For now, I just need to sit back and wait for my next fly. Interestingly the one thing that I have been doing with this down time is contemplating what type of fly I want to eat. The best deals are nearly always the ones others don't see.

Other Tags

We can help. Have a chat to one of our advisers.