Where and when is the greatest value realised for property investors?
Is it when they buy or sell?
Following the recent exposure of The Block TV show you could argue that the original owners made the greatest amount of money when they sold, yet the investors will argue that the best way to make money is when you buy. One of the key reasons that people focus on the sale instead of the purchase is that this is the time when your accountant records the profit and therefore any tax consequences.
At Property Planning Australia we firmly believe that you make your money when you buy, by buying right. At the point of purchase it allows you to compare like for like in terms of market value. On the flip side the difference at the point of sale can be significantly affected by the timing.
As an example, 2 of The Block properties were purchased for $22,000 and $24,500 in 1977 and then sold for $900,000 as part of the Block purchase in 2010. Similar properties in the street and in the same year were purchased for $33,500, $26,000, $33, 510, $28,000 and $26,500. You would say that those 2 Block properties were good buys at the time they were originally bought in 1977.
When you review the original purchase you can see that the properties were bought at a good price relative to the market conditions at the time.
If you the review the purchase in 2010 of $3.6 M it is clear that the price paid was high – but this was impacted by a number of factors. These include the desire to have 4 side-by-side properties, the market conditions in Melbourne at the time and the interest from other developers for those sites. In this case there was no or little money made by buying right because the properties were sold to a time frame to suit a TV show and not an actual investor’s time frame.
Had the properties been renovated differently, rented, held and then sold after a full property cycle had completed then perhaps the timing of the purchase might have been proved to be appropriate. Conversely an investor may have developed the sites into something other than 4 separate homes like apartments which would then have provided a different return to judge the buying on.
In the case of The Block properties, the result was compromised by the desire to fit in with a TV program. It does highlight the risks associated with a strategy of buy, renovate, and then selling in a short time frame.
Returning to the original question about when the money is made, it highlights the need to have a clear understanding of what the current market trends are, what represents real value and which properties have the right fundamentals to ride out market fluctuations whilst outperforming the market.
On a final note, when you buy, you are in control of your destiny as you determine how much money you pay. Unlike when you sell, the market dictates how much you sell for.
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