How to find a good real estate buy

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Is it a good time to get set in investment property, given the flat state of the market where prices have fallen and sales have slowed?

It's a question a number of Money readers have been asking over the past few months. There is no denying there are properties available for sale at less than what they would have brought a few years ago. But are these good buys now or could their prices fall further?

Tyron Hyde, director of quantity surveyor Washington Brown (www.washingtonbrown.com.au), says that thanks to the GFC he is seeing clients buy stacks of properties at close to their actual building cost.

Property on calculator

In a recent presentation, titled "Never lose money", Hyde proposed two ways of applying this rule to property investment. The first involves buying newish property (less than 10 years old) at construction value, getting the land thrown in.

One example he gives, at Orange in the NSW central tablelands, sold this year for $46,000, less than half the $95,000 price it achieved when it last sold in 2003. This price was also below the construction cost of $52,445, as estimated by Washington Brown. "Year one depreciation allowance for the property was $4000 or about 10% of the purchase price," says Hyde. "If you are on the top tax rate, that is a yield of almost 5% without even having a tenant."

Another, a home at Broulee on the NSW South Coast, sold for $660,000. It cost $641,988 to build in 2003, so the new owner has an 803sq m block of land at virtually no cost.

Finding properties like these takes time and effort. Calculating the construction cost is something a quantity surveyor can do easily, but how can you estimate this?

" A good rule of thumb is to find the original purchase price from somewhere like RP Data [www.rpdata.net.au], and multiply that by 0.5- 0.6 to get a rough of idea of the construction cost," Hyde says.

The second way not to lose money is to buy older property, say more than 40 years old, at close to land value and get the house thrown in, Hyde says. An example is a home in the prestigious eastern Sydney suburb of Bronte, which was built in 1925 and underwent a $305,000 renovation in 2006. With a land value of $1.04m it sold this year for $1.37 million, meaning the home was bought for virtually nothing.

Again, finding such properties requires a lot of effort. But once you have identified some that might fit the bill, obtaining land valuations for them is not too hard. In NSW, for example you can do it online at shop.lands.nsw.gov.au for $11.60 for any property you are not the owner of.

"All I am suggesting is when you are weighing up an investment property, consider the land value, consider the value of improvements and consider the construction costs," Hyde says. "And of course you still need to consider the location, future infrastructure plans, the vacancy rate of the area and the quality of tenant you can attract and the yield."

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Money's founding editor Pam Walkley stepped down in early 2015 after more than 15 years at the helm. Before that she was at the Australian Financial Review for 11 years, holding several key roles including news editor, chief of staff and property editor. Pam is now a senior writer for Money.