Have you considered investing interstate?
At the best of times, there is always the concern that the property you invest in won’t perform.
Add an interstate location to the mix – meaning you’re not able to see, visit and drive by, can create enough ‘fear of the unknown’ to stop investors from taking any action at all.
It leads many investors to only invest in their own backyard.
In a recent Real Estate Talk I wanted to discuss how can you make sure you’re not one of the investors who loses out but limiting your investments.
Here’s a transcript of the interview:
(Alternatively you can listen to the short podcast at the top)
Kevin: Hi, Michael, I know you’ve been looking at the idea of investing in properties interstate, and giving advice on it.
Let’s run through your thoughts on buying interstate and the common mistakes that property investors make when they’re buying inter-state, whether it’s sight unseen or not.
Michael: First of all, I think it’s a good idea to consider investing outside your backyard because we know that different property markets around Australia are at different stages of their own cycle.
One of the things that holds a lot of investors back is not buying inter-state, so it’s definitely something to be considered.
But then again, a lot of those who do buy inter-state make some common mistakes, so maybe today is a good time to alert people to these.
Kevin: One of the big pluses of buying in your own backyard is that you know the area.
That’s probably why a lot of people do it.
Michael: Sure, it’s in your comfort zone.
Kevin: Let’s have a look at a couple of the issues if you are buying inter-state and things you should be aware of.
What’s the first one?
Michael: One of the biggest traps people fall into is buying off the plan.
They’re buying inter-state and maybe they can’t afford in their local state at the moment, so they’re putting a smallish deposit down and hoping that the property market is going to pick up.
Also, they feel a bit more comfortable because they couldn’t really even see the property anyway.
It’s not built, so they don’t feel that bad buying something sight unseen.
We’ve discussed before the tsunami of problems that are going to occur with people buying off the plan with all the finance problems, with concerns about completion dates completion and problems with levels of finish.
One of the big mistakes to avoid is – don’t buy off the plan.
Kevin: You do end up paying a premium in a lot of cases, as well, don’t you?
Michael: Exactly – rather than the discount you’d expect for the uncertainty of completion of standards, of finishes, of how the market is going to be, or what interest rates are going to be – you should be getting a discount for all the uncertainty – you’re essentially paying a premium.
Kevin: In a similar vein, I guess, buying in master plan communities, house/land packages, traditionally, you have to go into some of those outer suburban areas?
Michael: A lot of people buy inter-state because the entry level is cheaper and they think, “For my X amount of dollars, I can buy a house and some land” – a landed property as some people call it – rather than the apartment that they may only be able to get in the more expensive capital cities of Melbourne and Sydney.
The trouble is that while that may seem like a nice idea – getting something new with some land – these outer suburban segments of the market have historically under-performed, and they’re likely to continue to do so in the future because of the typical demographic of people who buy there.
Young families who are price-and interest-rate-sensitive are likely to continue to do so, so they don’t make good investments.
Kevin: In the introduction, I mentioned about buying sight unseen, and I guess that’s always a temptation if you’re going to be buying inter-state, as well.
Do you believe this to be a good idea?
Michael: Just recently there has been publicity in the current affairs programs about a property that was sold with photos where this huge water tank behind, which wasn’t shown.
It seems despite the concept of ‘you can have all of the photos, the videos, and the walk-troughs‘, it’s interesting how you can actually hide unsightly features using a good camera and exploiting the right camera angles.
I’m not even suggesting Photoshopping.
I’ve heard horror stories of people who bought sight unseen thinking the investment property had an incredible view – and it actually did if you were looking out of the laundry or somewhere like that – or they didn’t realize that there were power lines that dominated the streetscape because they relied on the agent’s photos only.
The moral of the story is – don’t risk purchasing sight unseen unless you have a trusted representative such as a local, not an inter-state buyer’s agent, or somebody local who knows what is going on.
Kevin: One of the other temptations in buying inter-state is that you would actually buy from a marketer, that is someone who will come to your area and tell you about properties in other areas.
Michael: You’re right. I’m not saying all property marketers are trying to scam you, but there are a fair few rogues out there who add a significant premium to the property sale price that basically accounts for their commission.
There is only one person likely to make a decent profit out of this transaction, and it’s not the investor.
There are far safer, easier, smarter ways to invest in property than this.
Kevin: Do you remember the days of the white shoe brigade on the Gold Coast?
Michael: Yes, they were and unfortunately, they got a bad reputation – white shoes, gold chains, and selling properties in a two-tiered way, something that the locals wouldn’t or couldn’t afford to pay for, but making it sound good to inter-state clients because the price point is lower, so people thought, “Oh, it must be a bargain.”
Kevin: To sum it up, Michael, if you’re going to be looking at any kind of an investment, you really need to make sure that it aligns with your own goals and investment strategies and do your homework.
Michael: It does, Kevin.
One last mistake people are making is actually buying advice from out-of-town advisors.
We, with officers in three states of Australia, see some inter-state buyer’s agents who fly up, see a few properties, make an offer, and fly out again.
They don’t have the perspective.
They don’t have the depth of experience that you need to understand what makes a good investment property in a particular location, why one side of the street is worth more than the other or one particular street is worth considerably more than the next one.
You really need to rely on on-the-ground experience to ensure you minimize your risks.
I agree with you, Buying inter-state can be a savvy, financially rewarding way of growing your portfolio, but you have to make sure it fits in with your long-term strategy.
Thanks for your time, Michael.
Michael: My pleasure, Kevin.
Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts.