Here’s What a Good Property Deal Looks Like in Sydney These Days
As I mentioned in my recent Aussie property market update, home prices in Sydney have risen over 70 percent in the last five years. The median home price to income ratio across the city is now about 12 to 1.
In other words, the typical house cost twelve times more than the average person earns in a year. For comparison, the historic norm across the United States is 2.6 to 1.
What a Bad Deal Looks Like
Believe it or not, investors are still buying properties at these prices in Sydney and renting them out. Most tenants are renting because they can’t afford to buy, so these investors are unable to get enough rent each year to cover even their interest payments. They buy these properties on the assumption that they will go up in value more than their cash flow losses by the time they’re ready to sell.
That’s a big assumption. I’m not so sure I would call that investing. It’s more like gambling.
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What a Good Deal Looks Like
In my day job, I mentor property investors. They pay me to help them make smart investing decisions. As someone who is not particularly bullish on Aussie real estate right now, how can I possibly encourage people to buy homes in Sydney today?
Believe it or not, there are still potentially profitable deals to be found in Sydney; ones that don’t assume future capital growth. The important thing is to find ways to make money on real estate that doesn’t involve simply buying, holding and hoping for the best.
a $400,000 Deal
One Sydney investor I’m mentoring sent me a deal today that stands to make him about $400,000 profit within the next 18 to 24 months.
Here’s a photo of the property:
How about that paint colour?
It’s not much to look at, but it is very close to the CBD (central business district) of Sydney, which makes it a highly sought after location.
It’s a three bedroom, one bathroom home on a 291 square metre block of land. For my American friends, that’s less than 1/10th of an acre. In other words, it's tiny.
Here’s the current site plan:
Somehow this property even has a backyard:
So what’s this little beauty going for?
My client just signed a contract to buy this property for $1.35 million.
He’s paying cash.
But he’s not putting a tenant in the property; at least not for long. As a developer, his plan is to knock this little house down and build two in its place. Believe it or not, another developer got approval from local council in the same area to build a duplex on 270 square metres.
These two-story units he builds will have three bedrooms each. The going price for new three bedroom units in the area is currently $1.45 million.
Here’s a basic run down of his development costs:
| Item | Amount |
|---|---|
| purchase price | $1,350,000 |
| stamp duty | $63,000 |
| legal costs | $1,500 |
| borrowing costs | $1,000 |
| subdivision costs | $45,000 |
| project management fee | $4,000 |
| construction certificate | $20,000 |
| build two units | $900,000 |
| interest on build at 8% | $48,000 |
| final survey | $2,500 |
| TOTAL COSTS | $2,435,000 |
That means each new property owes him $1,217,500. Anything over that as a sales price is his profit. If he can get his $1.45 million sales price per unit upon completion, he’ll make a profit of around $400,000.
His primary assumption on this deal is that home prices will remain flat for at least the next few years. Unless something crazy happens overseas, he'll probably be right. The RBA still has a few interest rate cuts left in the bag for a rainy day.
Of course, there is a risk that home prices in Sydney retrace and come back down 10 or 20 percent, or more. Considering his timeline of 18 to 24 months, that’s a real possibility. If that happens, and he can’t sell these properties for a profit, his plan B is to live in one of the units and rent out the other one. He'll hold on until a brighter day.
Those are the types of deals that stack up in the Sydney market today.
What do you think? Would you have the risk tolerance for a deal like this?
Jason Staggers
Would i consider a deal like that?
Definitely not in this economic environment. Far to risky for me and i could never live in a shoe box......but that's just me, i wish him luck 😊😊
I'd have the risk tolerance, just not the funds or time at the moment.
What a bargain, that something I'm willing to buy and pay off for the rest off my life. Where do I sign. If it wasn't so scary it would be a comedy. Cheers
Great post mate! RESTEEMED :]
Thanks :)
Great post
Oh my....Sydney is worse than Brooklyn, New York. That is insane. Hard to "buy right" in that kind of market.
I've heard parts of San Francisco have grown 75% in the last five years. I wonder if that will hold up.
Yeah, San Fran and Denver, Co. have been out of control the past few years. Fastest price growth in the US.
And thanks for your comment giving me a segue to plug my book in my last post :-)
Lots of incredibles about that. The prices, the small size of the property and the fact that you can build a duplex on it (although I see a duplex going up near me on a 500 sq. m block (recently subdivided off the back yard of a 1012 sq. m, quarter acre block) and thought that was small for its land size).
I could do something similar with my property if I got rid of my shed and carefully navigated a sewer line, but the problem is that subdivision costs are basically the same here as you report for Sydney, but property value is less than a quarter of this one, so the numbers do not stack up.
So, I'm forced to stick to my share market and cryptocurrency investing.
Yeah I was surprised too. I think there's a risk the subdivision isn't approved in which case he can do a cosmetic reno and probably break even.
I would have thought a subdivision would be cheaper in QLD but when you start talking about removing sheds and difficulties with services the costs can really add up.
Good thing the future is bright for crypto!
Thanks for the thoughtful comment.
It used to be cheaper here in regional Queensland, but the Queensland government introduced legislation designed to cap and reduce the costs of council fees and levies on development. What may have reduced costs in Brisbane resulted in higher costs here. That's just for council fees. They also have extra requirements like extending the bitumen on the road to the verge (most roads in established parts of town have a gravel verge) and previously also required the developer to construct a concrete footpath, although they have now relaxed this requirement.
I think the actual construction costs are cheaper here, but higher property prices in capital cities allow more value to be added by development.
Would you ever advise purchases conditional on council development approval (probably hard to get the vendor to agree to in a raging bull market)? Alternatively, would there be value in buying, then getting approval and on-selling with DA? The extra stamp duty would eat away at some of the profits from this strategy (stamp duty is such a dumb tax).
Yeah, when I lived in regional Victoria, we had similar issues with council wanting you to pay for a new curb in front of the house and even extend it down to a point that made it ridiculously expensive. Footpaths are also a pain.
It's always great when you can get a due diligence clause accepted, but you're right, it depends on the market. In Melbourne and Sydney, a lot of investors are on-selling properties with approved plans and permits, but in regional areas, the land isn't usually valuable enough to get a profit. And the stamp duty is definitely a pain. Makes it really hard to flip properties.
Wow! that was very interesting read. As someone who rents in Sydney, I have no idea how I can ever afford something here. I gave up on the dream.
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Thanks. Keep working to grow your crypto base. There will be a big transfer of wealth in the years to come from speculative, over-leveraged investors to smart people like you. The dream is still alive :)
Great deal! Incredible a house like this can cost this price to you.
They certainly are expensive.
Wow i'm in Brisbane didnt know it was that bad, maybe I should consider selling the one i live in
The Brisbane market is not too far out of line with wages, at least for Australia. Will be interesting to see what happens there if prices turn downward in Sydney.