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Asset Appreciation, Bank Value & Rental Return
Having a property which continues to increase in value every year (appreciation) is one of the main reasons that people invest in property. Some property investors however invest in property for the depreciation of the building (which helps reduce their taxable income) and the income from weekly rental payments for cashflow.
Why would you want to invest?
A Buyers Agent Works for You
One of the first steps we take with a new client or student is to understand how much you can invest and what your investment strategy is. Whether you go through the Property Investment Training thoroughly or quickly to come up with a 1-page strategy doesn’t matter, what does matter is that you know your reason for investing.
Buyers Agents (called Buyers Advocates in Victoria) work for property buyers to help them in every aspect of buying a property – whether it’s to live in, as a first home or as an investment property – and this is called a Fiduciary Duty.
How is Property Value Determined
The most important property valuation, if you are borrowing money to invest or have a mortgage, is the bank valuation because it determines how much the bank will be willing to lend you.
The easiest and cheapest ways to get a bank valuation is through a mortgage broker as the cost is much lower and the mortgage broker will do the work for you for free (or for the chance of getting you a mortgage and earning a commission as a result). You’re also more likely to get a valuation that the bank will work with because the independent valuer takes that banks lending criteria into consideration.
Independent valuers are also available to determine the value of a property but the cost will be higher if you go to them directly.
Real Estate Agent Valuation (Appraisal)
Given that real estate sales agents work for the seller (called the vendor) they will try to appraise the value of a property based on comparable sales in the last 3-6 months and take into account any growth in property values in general in the last year.
This “Appraisal” technique is used to present the highest potential property values because that is what Vendors want to see. It is called an appraisal because real estate agents are NOT licensed to perform property valuations. Having said that, if it is a strong sellers market that value is usually very close to the selling price.
Often a bank will be interested in the appraisal value from a licensed real estate sales agent because they can provide examples of comparable sales to back up their appraisal value. They can also provide a good guide about the expected rental income for the property.
Commercial Property Valuation is based on Rental income
Commercial properties include retail shops, industry units and warehouses, and offices and the value of these properties is predominantly based on the net rental return. This is commonly measured in dollars per square metre but is only as strong as the current lease.
Commercial property valuations can depend on the length of the lease of the current tenant as well as their option conditions – whether the increases are based on CPI or Market Value. This is important because unlike most residential properties which only take 2-6 weeks to re-let, a commercial property can be vacant for 6 months or more if a tenant decides to vacate.
The lease and tenancy risk of commercial property means that banks will usually loan a smaller percentage of the total value (eg. 60% as opposed to 90% for some residential properties) which means you need to come up with a larger deposit.
Rental returns should also be higher and are often between 7-11% but make sure you study any claims that real estate sales agents make and be sure that they quote a net return after ALL expenses and outgoings.
Buyers Agents work for you
When there are so many capable real estate “sales” agents who will tell you that you can build a granny flat or that the returns will be massive it is important to either get the information in writing or use a real estate buyers agent to help you get to the truth.
Beware of claims that are made with the STCA disclaimer. It means Subject To Council Approval and basically means that what they claim could be WRONG! Council approval is a lengthy process which involves going through EVERY aspect of a property including zoning, other properties close by and what they have planned for the area.