In this podcast we discuss the new “off the plan” versus the old “existing” in the property market. Which is the best way to go if you are an investors or just plan to live in the property? With the ever increasing population in mind, are apartments the way to go? Join us as we have a very informative discussion with one of our podcast favourites, Michael Yardney.
 Listen into the podcast by using the player embedded into this page or read the transcript provided below. Enjoy!
PODCAST TRANSCRIPT :

Andrew Mirams (AM): Thank you for joining me today. With me is Michael Yardney, one Australia’s leading property experts. Hi, Michael.

Michael Yardney (MY): Hi, Andrew. Thanks for having me.

AM: Michael’s also the Managing Director of Metropol Properties and we’re going to lean on his expertise here a little bit. I want to talk a little bit about new versus old and the apartment growth and really, I guess, as our population grows, Michael, and the way people want to live today. Talk to us about new versus old apartments. So, we’re talking about, probably, the off the plan versus an existing property purchase.

MY: Well, it depends if you’re going to do this to live in it, Andrew, or if you’re going to do it as an investment. But if we’re talking as numbers, figures, investment, in general, off the plan you’re paying a premium today, and new apartments you’re paying a premium for them and if you’re going to live in them I can understand that sometimes you’re prepared to pay a premium. It’s much the same as when you buy a car. When you drive it out of the show room, as soon as you do, they’ve gone down in value a bit and I’m not prepared to pay a premium for my investment properties.

AM: That’s interesting you say that Michael because everyone that’s looking and that comes to me say ‘I know but you get low stamp duty or, you know, next to no stamp duty’.

MY: If you do.

AM: You’re saying you’re still paying a premium. How do you counter that argument?

MY: Well, I guess the answer is, how much extra are paying as a premium? The premium comes in the developer’s margin, the marketing costs – someone has to pay for those full page ads (advertisements) in the Age or the ads in Domain or the brochures and I know that property marketers, in general, get substantially larger commissions than selling agents for established properties. Especially when you talk about the investment, there’s a whole group of financial planners and property marketers who make 8%, 10%, sometimes even up to 15% of the value of the property. While it doesn’t show on the piece of paper when you sign the contract, it’s already in there, factored into the purchase price. You’re giving away your first 2 or 3 years capital growth to the developer and that’s not his to have, it’s meant to be yours.

AM: That’s interesting, isn’t it? I think there’s no amount of stamp duty that can refund that capital growth, can it?

MY: I think the other problem is scarcity. Therefore, what pushes up property value is not the fact that you’ve got a front or back yard but location, which is important, but also the land to asset ratio. A developer, in general, has the concept of putting as many units on that block of land as he can so he wants a low land to asset ratio. But, if you look at the more established properties that were built in the past, the apartment buildings, you’re going to find that you got, in general, you’ve got fewer properties there so you’ve got proportionately higher land to asset ratio. Some people say ‘I don’t get any land with it’, yes you do. You’ve got an 8th, a 6th, a 10th of the block of land; you’ve got the share of the apartments there.

AM: Yep and that plot, they never build out that plot, do they?

MY: That’s right. In general, the older apartments are larger, they often have more functional floor plans but the other thing I like about them is you’re not paying a premium for new and clean and pristine. Our concept is to buy properties that are going to outperform the averages because of their location, because of their scarcity; because of they’ve got a bit of a twist. But also, you can add to that by manufacturing some capital growth, making you apartment nice, clean and new like the new ones by doing a renovation on them.

AM: Okay, that’s interesting. You basically buy…you’re more interested in buying in a really good area with a great floor plan and then valuating via renovation.

MY: A really good example is the loan that you did for my son Brian last year. He bought his first investment property and paid $450,000 for an apartment in Elwood. He paid $450,000 and spent $50,000 renovating it. He did a new kitchen, bathroom, split system air conditioner, curtains, carpets and the like. In six weeks, all of a sudden he had a much nicer apartment with a wide range of tenants and rent was significantly more. I also know you got him the sort of loan where he only had to put 20% down and the bank lent him the rest of the loan. For $10,000 he was able to do his $50,000 renovation.

Now, nine months later that property’s worth $570,000, it’s been revalued at $570,000. It cost him $450,000 plus $50,000 renovations, that’s $500,000, but remember he had to pay stamp duty on the $450,000 and now he’s manufactured that extra equity plus he’s had the capital growth. Now he has the equity to go again. Unfortunately, being young and he’s hasn’t got the serviceability so rather than buying another property, he’s done what most young do, and he’s bought himself a new car instead.

AM: You’re only young once.

MY: That’s right. But the concept really is that not only has the market grown, but he’s manufactured some capital growth and that you can do with an established property and now inside it looks as new.

AM: Yeah and you can’t do that off the plan can you? You’re buying at…

MY: A premium.

AM: Yeah and the other thing I don’t like about off the plan is you can’t actually see what you’re buying. Sure, they’re glossy ads and they’re doing their jobs right but you can’t actually see what you get in the end product and you can’t visualise the size of the property.

MY: There are a whole lot of unknowns, there’s a whole lot of uncertainties and for those, in my opinion Andrew, you should be getting a discount but you’re paying a premium. The unknown is what’s the market going to be like in a couple of year’s time?

AM: Yeah.

MY: What’s the quality of the finish going to be like?

AM: Yeah.

MY: What are competing developments going to be like? What are interest rates going to be? Is it actually going to be completed? How many are going to come on the market because other people have either bought complex and can’t complete them? For those reasons, for all that uncertainty, you should be paying a discount but in fact today you’re not buying at today’s value.

The only reason developers can make them work is because the banks are going to approve them money because there’s a big enough profit margin. That’s why the presales of the plan. It’s so that they can actually get a level of certainty and the only way they’re certain is, if the developers making a sufficient profit margin. He’s actually not there to make anything for you. That’s okay. He’s allowed to do that but you’ve got to recognise that you’re paying a premium today, not today’s sell value.

AM: Yeah, absolutely. People are listening to this and they all of sudden think ‘Oh good. I’m going to rush out and do my own renovations…

MY: Yep.

AM: …and I’m going to go down to IKEA and get a kitchen. I’m going to rip it out and put it in myself’. Is that a little bit fraught with danger?

MY: First of all let’s remember the purpose of the renovation is to add value to a property that you’re going to keep so don’t get excited by The Block or those T.V. (television) shows and to do a renovation to flip. There’s no money in that. Most flips flop because by the time you pay the stamp duty and the holding and the rest, it doesn’t work.

The concept of adding value through a renovation can be good, but interestingly unless you’re handy, and I know I’m not, you’re much better to get an outside person to do it. A renovation company or Metropol has their own in-house renovation company. We’ve done about 50 renovations for clients last year because you can in and out quickly. The sort of volumes we’re able to do allows us to be able to buy materials, kitchens, bathrooms at substantially discounted bulk wholesale rates.

AM: Yeah.

MY: You’ve just got to be a little bit careful with buying these flat packages at IKEA or Bunnings and what’s the highest and best use of you time? Maybe you should get somebody else to do the renovations.

AM: Like you said, the purpose is to value add. You don’t want to make it look cheap because guess what? It still then rents cheap and looks cheap in the future, doesn’t it?

MY: Pretty much. You’ve got to do appropriate renovations. The other problem is you shouldn’t over capitalise. In general, I’d be spending up to about 10% of the value of the property on renovation. If you spent a couple of thousand dollars you’ll get a coat of paint, that’ll make it more attractive to tenants but it’s not going to add value. Spend too much and you’re not going to get your money back either. But, the best bang for bucks is the wet areas, kitchens and bathrooms, which are where doing a job on those, will make a difference. The problem of course is that’s probably the most expensive part of the renovations as well.

AM: I guess the other thing when you talk about your investment and what you put in is if you decide to do it yourself and it takes 12 to 15 weeks versus using an expert contract builder that can do it 6 weeks. There’s also your 6 to 9 more weeks of rent, you’ve got a high rent, you’ve got it in earning what it should be doing and that’s how you’re going to value add.

MY: It’s actually not meant to be fun. You’re actually meant to make you investments boring so the rest of your life’s exciting. But people get all excited about this and think ‘I’m going to spend week doing it’. Andrew, I’ve done that myself too. When I first started I did that. I guess a couple of reasons, I was cheap and I thought I’d be better off doing it myself and learning.

AM: Yeah.

MY: I remember the first painting I did, painting the kitchen of one of my investment years and years ago. No one told you’re actually meant to open to get fresh air and ventilation. Boy was I sick. Boy, I was sick at the end of that day, sick on the fumes.

AM: That’s not something you want to repeat. Is it?

MY: No, no. I haven’t bothered to put a paintbrush in my hand since.

AM: Yeah. Well there you go, sometimes you learn the best lesson the hardest way.

MY: Yes you do.

AM: Okay. Well, I think that’s a great heads up into the opportunity of value add to your property versus the off the plan argument on what you may save on stamp duty. Thanks Michael, I appreciate your time today.

MY: My pleasure Andrew. Thank you.