A bit of risk management analysis reports

Trust is essential when we want to help our investors to build a property portfolio and assist them with their financial situation. We offer to take them to the next financial level and to do better from a wealth perspective by serving their best interest.

However, in many cases, trusting the wrong people can lead investors to buy an undesirable asset class with closed eyes.

The Way To Gaining Your Trust

Usually, investment firms would establish trust with potential buyers. Once they have gained your trust, they would talk about the steps required for you to accumulate and grow your wealth.

When it comes to properties, they base their recommendations on third-party researches and pull a general wealth system and general studies. Though they may present to you several resources, all of it would indicate that the properties would work to your favour.

The studies may include key points that are not related so much to the individual property. Some of the critical points can be a new train station in the suburb or the city, sizeable urban renewal, population growth, 314 billion-dollar GDP statement, close distance from the water, established developer, high ceiling, luxury design and so on.

Considering that the investment firms have a vast interest in the deal, they would push you to make your purchase as soon as possible. They would make you believe that property investment is a long process and if you do not invest now, you will not be able to reap a good return on investment within the next 10 to 20 years.

The Cold Hard Truth

Not all investment firms are dubious in their dealings.

New infrastructures and general economic figures could produce growth effects. However, this is not applicable to every asset class. In fact, new infrastructures have the tendency to bring more developers and sellers to the area and this could cause your investment to not perform up to your expectations.

On another note, rather than getting a property with a 20% growth in 10 years time, you ought to choose a property that is expected to achieve close to 80% or 140% growth. There really is no point of buying the property now if it would have the same price in 10 years, with lower risk and likelihood to gain more returns in the short term.

Case Study 1

Suburb: Hamilton, QLD
Sale Price: $341,000
Sale Date: 29 May 2009
Settlement Date: 24 Nov 2011
Asset class: apartment
Configuration: 1 bed, 1 bath, 0 car
Total Lot Size: 45m2

Here is an example of proper Risk analysis, where there is no guarantee of returns on investment.

Initially from 2009 to 2011 nothing happened on the market and the risk of the settlement was high. This means that the purchase price was higher than the valuation price in 2011. In 2018, the valuation today has become even lower.

A weak valuation means that the investor loses more than $50,000 and exclude $13,000 on duties and legal cost which is about in total $70,000.

There is no point for investment firms to sell any lousy investment with a loss, however, some would say it is alright for you to lose now because you would stand to gain far more in another 20 years time. And they would repeat the same statement if the property does not perform well.

Therefore, it is critical for you as an investor to have access to credible property reports, rather than relying on the words of the investment firms.

One such report is the Riskwise Property Review. The comprehensive report shows the preferred configuration in Hamilton, key property indicators, market overview, predictions and equity risk factors.

As you can see, there are many vital factors in the report that are more important than a nice brochure or a general new infrastructures report that made by the investment firms.

With the CoreLogic report, you can see the median price of houses, which is above $1.3 million and the median price for units, which is around $530k.

However, the figures do not tell us if it refers to a 2-bed median, 3, 4 or 1-bed, with 1 car, with 2 car space, with 2 levels or with courtyard. CoreLogic measures dwellings, which are the median between all kinds of units types. It is important to know that whatever that is happening to the housing market cannot be related to the unit market.  

Therefore, these figures are not sufficient for your 1-bed investment. Unfortunately, investment firms and sellers use selective figures to push their sales.

A clear example is the below CoreLogic AVM.

As you can see, the median figures indicate that the reality is even worse! A 1-bed unit in Hamilton will struggle with a sale value of $220,000 and it might stay on the market for up to 12 months. This is extreme equity risk!  

Credible investment firms and sellers would not recommend a property that has a good chance of failing even in the long-term.

Case Study 2

Suburb: 338 Water St, Fortitude Valley, QLD, 4006
Sale Price: $354,850
Sale Date: 23 Apr 2013
Settlement Date: 24 Feb 2015
Sale Type: Normal Sale
Land Use 1: Building Units (Primary Use Only)
Asset class: Unit
Configuration: 1 bed, 1 bath, 0Car
Size: 50m2
Rent: $337

According to the figures in the CoreLogic report, the median sale price is about $420,000. However, this figure is not related to the 1-bed unit.

On the other hand, the Riskwise Property Review reveals in-depth information as well as the number of new properties in the pipeline for the next 24 months, which can determine the supply or demand risk.

Important Notes:

  • A large percentage of investors compared to only 31.1% of owners.
  • A high vacancy rate of 5.1%.
  • The preferred configuration is 3-bed units.
  • Extreme amount of properties in the pipeline will increase the likelihood to impact the rental market, which would likely cause poor cash flow on a regular 80% LVR.
  • Riskwise suggests again that this weak growth and high cash flow risk is likely to remain in the same condition for the foreseeable future.

When this kind of real-time data cannot be revealed to potential investors, we can no longer talk about trust and the best interest that investment firms could possibly have for their clients.

Companies that only act as a vendor seller will never be able to serve the best interest of their clients.  

Remember my tip, always take independent advice from someone who does not support anyone with a vast interest in the deal and use risk management to assess your property real value and risk.

Call us or send us an email at info@investinproperties.com.au if you have any questions, feedback, or would like to share a similar experience.

Meanwhile, if you would like to catch a glimpse of a risk and return-oriented property report, click here to download a free Underground High Growth Property Report.