Don't Buy Just Because It's Cheap

You get what you pay for.

This is a common proverb that is thrown around a lot in reference to low-priced goods and services. But, this is absolutely true for higher priced goods such as property too.

When it comes to investing in property, cheap isn't always good. In fact, if it's too good to be true, it probably is.

If you look hard enough, you can find properties incredibly cheap all over the country but this doesn't necessarily mean they make good investments.

The term 'good investment' is inherently subjective but there are some key characteristics we can base the investment on.

Yield and historical capital gains are two important factors to consider when weighing your investment options.

Yield is a measure of how much cash the property produces as a percentage of the property price. When calculating yield, price isn't the only factor, you also need to take into consideration what the property can be rented for.

In areas where properties are cheap, it is likely rents will be too and this means cheap properties don't necessarily have the highest yields.

In many cases, properties in areas with moderate prices have the best yields because rents are relatively higher. Take Dunedin for example, prices there are comparable to Christchurch but rents are higher because of stronger demand for quality housing so yield is higher.

Lower priced properties often have higher yield but lower projected capital gains

On the other hand, historical (and forecast) growth is equally important to consider.

Areas such as Auckland have historically had very strong growth whereas some rural areas around the country see little growth over long periods.

Savvy investors look for properties in areas they considered undervalued but have the potential for gains.

For instance, Christchurch has long been considered a city that has lots of potential for growth and is still undervalued compared to the rest of the country so investors have flocked there in recent years.

Regardless of which property you choose, it is important to conduct thorough due diligence on the property, developer, site, location, specifications, etc. more than just the price.

Reputable developers know the cost of sites, materials, and their own margin and they price accordingly.

Every so often developments will come to market that is well below 'market price' which sparks a lot of interest from investors.

Some developments that are priced too cheap to start with never end up being built

But, these developments often have issues because they underestimate their costs, and (every now and then) the build won't happen because it financially doesn't stack up and the purchasers have to suck up the time commitment/legal fees they have already paid.

If it seems too good to be true, then it probably is.

This is not an uncommon occurrence for new developers who perhaps don't have a full understanding of pricing their product.

Some newbie developers try to strategically price their developments low and take on smaller profit margins so they can build a reputation and shift some stock quickly, but this can turn bad quickly if their costs increase.

Ultimately, it is up to the purchasers to conduct all their due diligence on the developers but working in partnership with experts in the field such as Thrive allows purchasers to have more confidence in the process and lead to better outcomes.

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