Finding Diamonds In The Rough
As properties drop in value, bargain hunters have emerged looking for the best ways to get their hands on investment gems, Sally Lindsay writes.
1 March 2023
While house values across the country were 7.2 per cent lower at the beginning of the year than a year ago, essentially wiping $100,000 to $200,000 off prices, investment bargains have been scarce.
The biggest fall over that period was in the Wellington region where the average dwelling value fell by just over $200,000 to $928,349 in January from $1,128,708 in March last year.
In Auckland, the average dwelling value is down by $167,443, falling to $1,352,898 in January from $1,520,341 in March last year.
Along with declining property values, investors with mortgages are finding it tough after the increasing number of hurdles put in front of them.
In the past two years they have had to come up with 40 per cent deposits, unless buying a new build, accept low gross rental yields, higher mortgage rates, not to mention tough serviceability tests, increasing compliance costs, removal of interest deductibility, and flattening rents.
But while few and far between, savvy investors are still finding investment opportunities.
Property analysis company CoreLogic’s chief economist Kelvin Davidson says anecdotally there are relative “bargains” to be picked up, with some developers looking to shift stock so they can crack on with their next project.
“In this weak market, others will simply be doing deals on existing properties at discounted prices.”
Nick Gentle, co-owner of iFindProperty, a nationwide buyers’ agency for investors, says there will be more bargains to be found this year.
“There are some good deals out there for investors who are able to get the finance, and can make the numbers work despite the tax rules,” he says.
“Most people think a bargain is just buying a house cheap. They look at the median prices and whether they are going up or down.”
LEFT Greymouth has good yields but maintenance costs are similar.
BELOW An expected glut of new builds will provide opportunities for investors.
THE REAL BARGAINS
He says a real bargain is deciding whether real estate can create the outcomes a buyer wants. “For example, is there potential to improve the property, its cash flow and yield against the price originally paid.”
Analysis by CoreLogic drills into property types and location to identify where gross rental yields are the highest. The latest data shows the highest yields tend to be found in areas with cheaper house prices, and there is always an element of risk involved.
The Buller District on the West Coast has the highest yields in the country at 6.2 per cent compared with 4.6 per cent last year, but rental property risks, such as long vacancies, are greater, so high yields are essential, says Davidson.
“Data doesn’t give any indication of the risk attached to a yield. A yield might look good in places like Greymouth, but when it comes to doing maintenance, such as
replacing a roof at a similar cost to the rest of the country of $50,000-$100,000, then it becomes expensive in real terms for a rental in areas such as that.”
He says while Auckland or Tauranga investment properties might only have a yield of 1 to 2 per cent, rent yields are more secure and an investor can rely more on being able to service the mortgage.
“However, if property values keep falling yields will increase at a faster rate,” says Davidson.
Gentle says the first and most important step for investors is to define what a bargain means to them, then what makes sense to add to their existing portfolio and also an understanding of the rules around tax.
He recently put in an offer in the $900,000s on a Wellington property, based in an area of student flats, that was priced in the $800,000s with an extended due diligence period. In that time he had a valuer, builder and property manager assess its potential. Two bedrooms could be added for a much higher yield and justified the superior price offered.
While that was a good move, he says it won’t work in every suburb. “If contemplating a property in a suburb heavy with three-bedroom properties, adding a further two bedrooms might not work because buyers or renters might not want a five-bedroom house.”
NEW PROPERTY GLUT
Gentle says because the heat has gone out of the market and fear of missing out (FOMO) has been kicked to the kerb, bargains can be found if the property has been on the market for a while, it is mis-marketed, or the sales pitch is wrong. “This happens all the time.”
Another avenue to exploit is the glut of new properties expected to come on to the market this year. “As projects are finished buyers might not be able to get the finance needed to complete the deal, developers will want to off-load the final few unsold properties quickly, or rent won’t cover investors’ costs without substantial cash top-ups and there are no capital gains.
“Sellers will be wanting to close out deals quickly and prices will fall away.
“Off-market deals can also be advantageous to investors. One example is a Rotorua property with 9 per cent yields iFindProperty found for a client, who turned it down. Another are some Wellington flats, which used to have a 5 per cent to 6 per cent yield, and now have a 7 per cent yield.”
The other big advantage this market offers is for buyers having more time to do due diligence and scope out work that can add value to a property, says Gentle. Two years ago they would have had to put in an unconditional offer within days to secure the property.
Hamilton-based Lodge Real Estate managing director Jeremy O’Rourke says savvy investors are now doing their due diligence upfront to be in a position to move quickly if a property that suits their criteria comes to the market and the seller wants or needs to liquidate speedily.
“We are finding investors who do their homework upfront and come in with a clean offer usually secure the property.
“Those who haven’t and are making offers with a property to sell or a finance clause are not getting a look in on good properties that can be rented.”
O’Rourke says vendors will often take an offer at a lower price if it is clean and they don’t have to wait weeks or months to settle. “Certainty for vendors it is often more important than price.”
Buyers with clean offers can move earlier than expected to add value to the property, which is a lot easier and cheaper if the settlement is quick.
THE LONG GAME
Gentle says investors who are happy to play the long game can do well. “They might, however, need help in sourcing a property, particularly if it’s not in an area they are familiar with, the property is quirky or has problems, such as unconsented building work. These properties can often be a source of bargains and a higher yield if they can be fixed.”
He gives the example of a four-bedroom property priced at $600,000 and a three-bedroom property at $500,000. The three-bedroom property has a carport converted to an unconsented bedroom. The buyer won’t be able to get insurance and the home owner can’t re-mortgage. “If the potential buyer is willing to fix the bedroom with council consent they will end up with a house valued at $600,000.”
He says even if there are bargains that make sense investors still need to play their cards conservatively.
O’Rourke says to some degree Hamilton investors are finding relative value in the market and are back buying.
“Many long-time investors are starting to look again as they see reasonable value in properties for sale, not a lot of properties available for rent, and rents under pressure to rise.
“We have the lowest level of properties available for rent at any time ever and it is causing problems, particularly for people coming from overseas for work along with regular tenants and students.”
Long-time active property investor, property finder and Wellington Property Investors Association president Peter Ambrose says finding a gem is about buying at fair market value and finding a property with the potential to increase capital value.
“What properties are selling for is always based on supply and demand.”
His go-to for finding investment property that suits his criteria has always been building up relationships with real estate agents.
“They are talking to potential sellers regularly and know where the opportunities are and whether desirable properties will come on to the market. A lot of deals can be picked up this way.”
Ambrose says the market right now offers the best opportunities to talk to agents and property finders. “In the boom market agents were listing properties and
selling them straight away.”
Now properties are taking longer to sell, agents are open to buyers looking for opportunities, although many investors, particularly those with one or two properties, are sitting on the fence neither buying nor selling and waiting to see if there is a change of government in October, which could improve their property fortunes.
Irrespective of the market, Ambrose says it is always worthwhile to look at properties and understand the rules around subdivision and adding extra rooms. “This also applies to an investor’s existing properties, including their own home.
“Also, understanding a suburb’s demographics – is it growing or declining? – is a good indicator of its economic health.
“Before Covid there was a drift to city centres. Post pandemic the suburbs have become more popular as people have opted to work from home or only go to the office once or twice a week. The demographics have changed quite dramatically and offer opportunities for investors.”
Traditionally, it is at this point in the property cycle that bargain hunters emerge, with the goal of picking up a cheap property from a seller with few options.
“If someone has been looking for a couple of years, they might see a property selling for much less than a comparable property sold for last year, and see that as a good deal.
“But it is really about comparing properties to what else of a similar type is available in the market right now and for what, and that makes it much harder
to quantify a deal.”
If it is possible, it is a good time to buy, but many people are nervy as they are not sure what is happening with the market, and feel like they are swimming
against the tide if they buy, Gentle says.
Other agents say the best thing to do is buy in high value suburbs, because the cream has come off the top.
Investors can now go into better neighbourhoods, anywhere in the country, and buy themselves a do-up opportunity.