Should I buy a new apartment in Darwin. If
you are looking at investing in property,
should you purchase a new apartment in Darwin?
Maybe because you think Darwin is a good area
or you are going to get some sort of government
grant or government boost in order to invest
in new property. Well, there are definitely
some things that you should consider and some
big risks that you need to be aware of if
you are looking at investing in new apartments
in Darwin.
Hey, I am Ryan from OnProperty.com.au, helping
you find positive cash flow properties and
the reason I am creating this episode is because
I had a reader email me and say, "Hey Ryan,
I am a FIFA worker so fly in, fly out, looking
at investing in a property in Darwin. Going
to live in it for 6 months and then potentially
move out and rent it out as an investment
property. What do you think?
Are there some things that I should consider?"
And they are looking at a particular new-build
apartment in Darwin.
So here are some of the things that I think
you should consider when you are looking at
any new-build apartment at all whether it
is in Darwin, Melbourne, Sydney, Gold Coast,
Timbuktu, wherever it is it does not matter.
You need to consider these facts. And the
facts are - I think it is about over 80% of
all new-build properties in Australia are
sold through property marketers. Property
marketers are people separate to the developers
who try and sell the properties for the developers.
So effectively, they act like real estate
agents but the reason this is a concern is
that they get big commission on these properties.
Because there tends to be an oversupply of
these properties, because these properties
tend to be overpriced anyway and hard to sell;
these companies and developers employ the
help of property marketers in order to sell
these properties and property marketers get
a commission for that. Commissions for a standard
real estate agent selling a regular property
tend to be around the 1% to 2%, maybe 3% mark.
Commissions for someone selling a new build
property or property marketer, anywhere from
6% to 8% or it can be discretionary, anywhere
from $5,000 up to $70,000 or $100,000 commission.
Now, this commission is generally added on
top of the developers' margin, that they want
to make. So it can lead to massively overpriced
property.
I am really concerned about this because I
have seen so many of my readers, I have seen
so many of my friends actually got stung by
purchasing new-build property through property
marketers that were overpriced for the area.
They got sucked in by the sales pitch and
end up paying too much for a property. I did
a full episode on things that you can do to
mitigate your risk when buying through property
advisor or property marketer. They tend to
disguise themselves property advisors offering
free service out of the goodness of their
hearts. So you can check that out. Go to OnProperty.com.au/282
and I will talk more at the end of this episode
about some things that you can do to mitigate
your risk.
So wherever you are buying, whether it be
Darwin or anywhere else, if you are buying
new-build property and you are not going directly
to the developer, you are not buying the land
yourself and then sourcing a builder yourself,
then there is going to be a large chance that
that property is going to be overpriced because
there are just many layers of commission in
there and profit that people need to make
so the property ends up being with an inflated
price. So big risk no matter where you are
buying.
The thing you need to consider when investing
in Darwin in particular is I was at a wedding
the other day for Ben Everingham who is my
recommended buyer's agent and I was sitting
at a table talking to people who lived in
Darwin and they were saying, "Yeah, in Darwin
at the moment so many rental properties in
the market. Rents are going down and you can
really bargain for properties and get rent
at a really good price." And they were talking
about how awesome it is for them as renters
in Darwin because the rents are going down
for them. So it is a big .... as soon as I
hear rents going down and that there are a
lot of properties, you can kind of pick and
choose, to me that says that must mean a high
vacancy rate and as an owner of a property
you want that to be low vacancy rate, more
demand than there are properties because that
pushes rent price up. You do not want it to
be going the other way because that tends
to mean an oversupply in the market which
leads to both long vacancy periods, lower
rents and also when it comes to selling your
property, it becomes harder to sell your property
at a good price.
So I thought I would do some research into
this, so if you go to OnProperty.com.au/vacancy,
it will take you to this tool by SQM research.
Absolutely awesome vacancy rate tool. And
I have put in the postcode for Darwin, which
is 0800, and basically you can see vacancy
rates. Now to give you a guide, anything under
1% is awesome; under 2% is good; under 3%
is pretty good as well. Anything over 3%,
you get a bit concerned about and anything
over 5%, you kind of want to stay clear of
that unless you are absolutely sure you know
that market. So I looked at Darwin and I looked
at July 2013 or let us go forward, September
2013, we can see rental rates of somewhere
around the 2% to 3% mark. Not too bad, that
is alright. But then we look at the last year,
18 months, and we can see this steady increase
in vacancy rates in the area to the point
where there are 120 properties on the market
in Darwin itself with probably a 10% vacancy
rate. It does not give us accurately, exactly
what it is. But 10% vacancy rate is bad. And
growth in vacancy rate is bad as well. So
when you see high vacancy rates and you see
the vacancy rates going like we do in Darwin,
that is a red flag that is oversupply in the
area.
Now if you are looking at purchasing a new-build
property, like an apartment complex, all of
a sudden when this project is complete, there
is going to be another 30, 40, 50, a hundred
property that instantly flood the market as
soon as this is complete in terms of availability,
in terms of rental and things like that. We
already have high vacancy rates, probably
an oversupply in the area and if we are purchasing
a new-build apartment, it is going to be more
properties. Is that not just going to lead
to more oversupply?
So if I am going to invest in Darwin, I want
to look at the economics of Darwin. I want
to look at population growth of Darwin. And
if I am investing in an area that is already
oversupplied, I need to know that in the future
it is not going to be oversupplied because
maybe we are running out of land to develop
or maybe there is going to be an influx of
people into Darwin because Darwin is so awesome,
I do not know. I do not know much about Darwin.
But when I look at Darwin and I look at purchasing
new-build apartments in Darwin, I do get very
concerned because: a) new-build apartments
are generally overpriced anyway; and then
b) the vacancy rates in the area is extremely
high and that is a big for concern for me.
So what are some things that you can do to
mitigate your risks if you are looking at
investing in new-build apartments, whether
it be in Darwin or anywhere else. The first
thing that you should always, always, always
do is actually research existing apartments.
Now this particular development that I was
looking at, I am not going to call them out
by name, but basically they are 1-bedroom
apartments, started at $430,000 and went up
to $460,000. So what I would then if I am
interested in 1-bedroom apartments, I simply
go to realesteate.com.au, to the buyer's section.
I put in the suburb, which in this case is
Darwin. I make sure I am only looking at the
same property type, in this case it is apartments
and units, and i set minimum beds and maximum
beds to 1. So it is only going to show me
properties with 1-bedroom. And basically I
have sorted them by date, newest to oldest,
and if I go through I can look at existing
1-bedroom apartments that have already been
built and look at the price. So we can see
$348,000 for this 1-bedroom property in Darwin.
So that is $80,000 to $110,000 cheaper for
a 1-bedroom apartment. Now obviously you need
to compare what the complex is going to be
like, what the property is like. But basically
I can go through this. I can see this place
is $250,000. This looks very small because
of the couch in the kitchen, so maybe not
exactly relevant. We have a pretty nice-looking
complex here, $353,0000. Again $80,000 to
$110,000 cheaper. I am going to ignore the
ones that are super cheap. We have one here,
$460,000, so that is a similar price. Again
$350,000, $370,000. One for $565,000, I wonder
why that is so expensive. A cheap one for
$225,000 and $250,000. Maybe they are holiday
resorts or something like that. Maybe they
are studio apartments. $345,000, there is
another one for $460,000; $349,000; $385,000;
$425,000; that looks like a new-build property
there. we can keep going through this, $360,000;
$397,000; $350,000; one for $478,000; you
get the idea. The majority of the apartments,
1-bedroom apartments, in Darwin seem to be
around that $350,000 mark. There are a few
above that in the $400,000s but generally
like $350,000, $380,000, $398,000. There are
cheaper ones for $275,000. Here is one for
$400,000. And these are big apartment complexes
so they probably have all the good stuff like
a good pool, they have the gym, they have
all that sort of stuff in there because they
are already in bigger apartment complexes.
So by doing our research and researching existing
properties, we can really get the idea that,
"Hang on a minute .I can purchase this new-build
property and pay potentially $80,000 to $110,000
more than I need to." And the fact that we
have a vacancy rate of 10% in Darwin might
mean that these people are finding it hard
to sell their property which means that we
could get a discount on existing properties
even further to save us even more money. So
is it worth buying new-build property and
getting maybe a grant or maybe a boost from
the government of $10,000 to $20,000 but overpay
for a property by $80,000 to $110,000. You
do the math on that. For me, that is absolutely
not worth it.
The second thing that you should try and do
is to find out how much commission they are
getting. If you ask these property advisors
how much commission they are getting from
these property, generally they are not going
to tell you and that is a big warning sign
for me because if they are not willing to
disclose their commission, if it is not transparent,
then that is an issue for me. For a real estate
agent, it is really easy to find out their
commission. It is generally like around 2%.
You can call the real estate agent and say,
"Look, I am looking at listing a property.
Just trying to work out what your commission
right is." And they can probably tell you
right off the bat, very transparent. However
with property marketers, they tend to hide
it. In the fine print, the commission is generally
put on the build, not on the purchase of the
land or whatever it may be. So, definitely
concerns there. So try and find out how much
commissions they are getting. You are probably
never going to find out which means they are
probably getting paid too much.
And also, if there is a rental guarantee,
run for your life. Basically. Rental guarantee
means that they are offering something for
a reason. There is no free lunch in terms
of property. You are not going to get a rental
guarantee because they absolutely love you,
they are offering rental guarantees because
it is hard to sell these property at this
price. By offering a rental guarantee, it
is kind of like a carrot that an uneducated
investor is going to think, "Oh, this has
a rental guarantee therefore it is a good
investment." So it is kind of a trick of the
trade. They offer a rental guarantee on an
overpriced property in order to get people
who want that guarantee and see it as stable,
to actually invest in the property without
doing their own research. So if you see rental
guarantee, run away.
So those are the few things that you should
do. I have a list of 7 things that you should
always do before buying from a property advisor.
You can download a free checklist for that.
go to OnProperty.com.au/282 in order to get
access to that free checklist. So when it
comes to Should I Buy a New Apartment in Darwin,
you guys can see my opinion on it. It is that
it is high risk and you really need to consider
your options, consider the future growth potential
of Darwin before going ahead and doing this.
But definitely some concerns that I have about
doing that.
Look, I wish you the absolute best in your
property journey. I do have a course on how
to do suburb research. So Some of the stuff
that I have talked about here to understand
whether an area is a good area to invest in,
likely looked at Darwin and we saw high vacancy
rates - that is one of the things to look
at, we also want to look at population growth,
the economics of the area and a bunch of other
things to make sure the area is a good area
to invest in.
So if you want to learn more about how to
do suburb research, check out my course. Go
to OnProperty.com.au/suburb and you can check
out the course details over there. That is
going to help you mitigate your risk, understand
the suburb so you do not invest in an area
that is oversupplied like Darwin is potentially
and so that you will invest in an area where
it is likely to grow in the future. So again,
that is OnProperty.com.au/suburb.
Until next time guys, stay positive.
