05/12/2012
Question: I’m new to property investing and after buying a $600,000 investment that is draining my cash flow, I’ve decided that lots of lower priced properties is a better way to go. What’s proving difficult about this strategy is negotiating with vendors to get a better price. I know listing prices are usually an inflated figure for what the property is worth, but to be honest, I’m not all that good at negotiating them down. What’s the best way to do it?
Answer: Being motivated and having the right mindset is important in building your property portfolio, so first of all, congratulations.
When building a property portfolio it is important to have a strategy, just as any large and successful company would have a business plan. You need to have a sound acquisition plan in place before you start purchasing properties. Three things are a must:
1) Buy the property below market value: This ensures you gain equity from day one and you're not just being a passive passenger waiting for the property cycle to make your profits. This also provides you with a plan B, an exit strategy if your circumstances change. I always believe in being an active investor and being able to control your financial future.
2) Strong rental yield: Ideally a property should be cash flow neutral or positive from day one with room for increases. Most of my purchases have 7- 15% gross yields the day I purchase. This is critical for building your portfolio as your serviceably should improve with each positive geared property you purchase.
3) Don't bring emotion into the deal: Numbers don't lie. They will be the crux of a successful portfolio. If the numbers don't stack up, walk away. ‘Bargains of the year’ come by every week.
When trying to negotiate a price down, I suggest first getting a good understanding of the market you’re buying into and property values there. Familiarise yourself with all aspects of the local property market, including past and recent sales.
In creating a base price of what I think a property is worth, I use the same tools that valuers use, being mindful of comparing apples with apples: land size, age, condition and location. I also factor in whether a property needs a cosmetic or structural renovation and wider population trends, amenities and infrastructure – both present and planned.
I also suggest finding out what the market rent would be for the property. You can do this by looking at rental listings online and by speaking to local property managers. This will give you a good idea of not only possible rent but also the level of demand there is for that type of property. Knowing the likely returns will put a ceiling on the price you’d probably be willing to pay.
If all else fails and you find negotiating is outside your skill set or that doing due diligence simply takes too much time, you can always employ a professional property negotiator or buyer’s agent. They can act on your behalf to achieve the lowest possible purchase price, provided the numbers stack up and emotion is out of the equation. Good luck!
- Answer provided by Nathan Birch, B-Invested
