Should I buy a new apartment in Darwin as a home or investment? What are the risks associated with that and why is it potentially a really bad decision?
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.