2 things you might think have nothing in common, are actually very much alike.
Boz takes you through why changing the recipe is not a good idea.
Hey everyone, Boz here from OpenCorp for this week’s Property Wealth WOD. Now we’ve actually got a bit of a continuation here. So as you know at OpenCorp we love to take questions from people, because guaranteed what they’re thinking is probably what 90% of everyone else out there is thinking as well. This one comes from Shane. Shane, thanks mate for your question about client night, not long ago. It’s basically an extension to what we did last week, where we were talking about the importance of buying under the median house price. So click in the link below to see last week’s W.O.D, and then this is an extension of that.
I’ve just reconstructed the diagram here that we went through last week. So basically really quick recap, here’s the most expensive property in a suburb, there’s the least expensive property in a suburb, here’s the median value, which is actually the middle value, where you have half of the sales below the median and half of the sales above the median in terms of price. Now the example we were talking about last week was a suburb in Melbourne where we have been placing some clients into, two to three years ago, and the current median house price for four bedroom properties in that area is $730,000.
Now what Shane’s question was is, I won’t disclose the amount, but let’s just call it $400,000 for example, he said, “If you had a lump sum of $400,000, what would you do with it?” This question was posed to Al, Cam, Matt, and me. Basically it’s all about staying the course and following the strategy. So I’m sure some of you that have been following OpenCorp for a while will have heard my analogy about grandma’s bolognese, she spent 25 years perfecting it, just don’t mess with the recipe, follow the recipe. We’ve been investing for 25 years, this is the formula that works and this is why.
So when we look in this particular suburb the temptation, because of the lump sum of money or borrowing capacity that we have, is to buy a more expensive property because we feel we’ll get better growth on it. The tendency to spend what we’ve got capacity for is how we work, but actually that can be the worst thing that can happen. So in essence what we want to be doing is sticking to the strategy and still buying properties under the median house price. The reason for that is because we want to be able to be building a portfolio to take advantage of compound growth, which is growth on top of growth on top of growth. So in essence if that $400,000 was able to cover three deposit and costs on $600,000 properties, compared to one to two $900,000 properties the asset value that we’ve got is still the same but the outcome from a growth perspective is far different.
This is what I mean. In order for us to be able to build a portfolio we need to be compared to more expensive properties, which we are if we buy at this price point because the median is well above our purchase price. So valuers will give us equity uplift because we are being compared to superior properties than ours. However, if we’re buying the most expensive property in the area or close to it, just because we can, the valuations are going to be compared down, closer towards the median. So where one is giving us equity in spades, one is not.
So the whole purpose of today’s W.O.D is to really help emphasize, don’t mess with grandma’s bolognese. Follow the recipe, do what’s working once, and if you have got the capacity to be able to do more, do more of these, rather than this just because you can. The outcomes will be far better. Hopefully that’s been helpful. Pick your strategy, stick to it, follow what works. It’s a proven process and we’ll see you next time.