You don’t make your money when you buy property

It’s one of the most-touted mantras of property investors: “You make your money when you buy, not when you sell.”

This mistaken belief that you make your money when you buy a property could be holding you back from some of the best deals around.

While it’s true you make your money yhen you buy, it’s not because you buy a bargain or a cheap property, it’s because you buy the right property– an investment grade property in the right location - one that will deliver you long-term capital growth. 

In today’s market you won’t find this type of property cheaply.

As our markets are slowing down there is a flight to quality with more investors chasing the fewer  "A grade properties" on the market.

However, many budding investors misinterpret this advice... and the results can be disastrous.

In fact, missing out on a property with great potential simply because you couldn’t negotiate $5,000 or $10,000 off the price, could actually be the costliest mistake of your life.

If it’s in a growth area or great street, or it has renovation or subdivision potential, those few thousand dollars won’t amount to much over the life of the investment.

What’s worse, backing down because negotiations stagnate could see you missing out on a potential goldmine!

Focused firmly on the future

The savvy property investor knows that prices and market trends are transient.

Instead of focusing on getting the lowest possible purchase price, they have their eyes firmly on the future and the money that could be made from the property down the track.

Say, for example, you have the choice of two properties, in similar suburbs, with similar median prices.

Property A is $10,000 cheaper, for pretty much the exact same amount of land and living space.

But Property B is in a suburb with massive infrastructure growth on the horizon, a new aquatic centre under construction, and is in the catchment zone for a better school.

The growth potential of Property B far exceeds the initial $10,000 extra you’ll need to invest – and the current owners know it, hence the price difference.

They probably won’t be amenable to negotiation, so sticking to your guns in this instance won’t work.

So, do you walk away, telling yourself, “You make money when you buy, not when you sell”? 

Or do you offer the asking price, confident that in a few years that $10,000 will be small change compared to the growth you’ve enjoyed?

It all depends, of course, on how long you’re planning to hold on to the investment.

If it’s a short-term flip project, then the purchase price is going to matter a lot more, as it eats into your profit margin.

Short-term market predictions are always going to be more hit and miss than long term, so growth and resale potential are harder to gauge.

On the other hand, if you’re planning to buy and hold, the future outlook is far more important to your bottom line than the initial price you paid for the property.

The other "golden rule" of property buying...

The same logic can be applied to buying the worst house on the best street.

While it’s probably considerably cheaper than the neighbouring renovated properties, it’s still going to command a higher price than similar homes on less desirable roads – but the potential is exponential by comparison.

You’ll be able to piggy-back on the status that’s been built up by your neighbours, and any work you do on the property should return higher gains than it might on a less-popular street.

That $15,000 kitchen reno could see the value of the home increase by $40,000 on Prestige Place, while it might only add an extra $20,000 to a comparable place on Average Avenue.

While nothing in property is certain, narrowing your focus to the short-term and obsessing over a few thousand dollars is unlikely to be a winning strategy in any market.

Instead, look at the bigger picture and remember that the big payday will come when you sell the property.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.