Property investment is not just about acquiring and operating properties that are new and fresh off the market.

It’s also about developing a good strategy that could help investors save on acquisition costs and maximise their earning potential- one of these is what is called a discount property investment strategy.

This is commonly associated with investing in distressed properties where investors could avail of investment property that is below valuation but definitely not below the asking price of the seller.

Who can leverage this strategy?

It can be for any property investor looking for a good deal such as purchasing property at a discount, those who want to be guided on a hassle-free process of researching for discounted investment properties, and those who know of resource tools that help determine and analyse property values.

This is a great strategy for property investors looking to optimise their returns because a property that is purchased below its fair market value provides instant equity.

Equity is the difference between the property’s prevailing market value and the mortgage amount owed.

What to target for properties purchased at a discount?

It’s important that you set realistic goals when purchasing discounted properties and here are some tips on how to do it. 

Explore, negotiate and make an offer to purchase the property being sold for 10% to 20% below its fair market value compared to similar properties that are being offered or have been recently sold.

Look for properties where a seller is in a hurry to dispose of the asset or has set a deadline to sell.

Determine your budget range and fix an amount that you would be willing to pay for and no more, regardless of whether it is through an auction or private treaty.

Do your research to understand key property facts such as locality, local economy, market demographic, occupancy and vacancy rates, etc.

When eyeing a property, make sure to find out about the property’s history so you are aware if there is a sale history or if it has been in the market several times.

Understanding the property market cycle

The real estate market goes through a cycle and it is something that you need to be aware of and it varies by location and market volatility.

The cycle begins with rising demand, followed by a boom where demand generates a strong market activity, then it ebbs and slows down as supply and demand are being met, then it goes through a stagnant phase and finally becomes a bust where market activity is no longer moving.

However, the bust market triggers the start of a recovery period once market forces drive a new supply and demand cycle, marking the start of a new cycle.

Take note that during the boom stage, it is difficult to avail of higher discounts because this is the stage where it is highly competitive such as buyer demand is high.

In contrast, a bust market is a stage where there is a large supply volume and with fewer buyers, which ultimately results in getting bigger discounts.

Capital growth rates

It is vital to know how capital growth works and how it is impacted during boom or bust markets.

During the boom stage, properties are closer to their fair market value and making it possible to generate double-digit capital growth for an investment portfolio to increase in value.

While during a bust stage, a potentially attractive investment property can be a good bargain especially when offered with a large discount, but it could risk becoming a liability especially if the property sustains its decline in value.

How to avail of distressed properties

Now that you are on your way to equipping yourself with the tools and resources to help you strategise your property investment goals, here are steps to undertake if you plan to go for distressed properties to your investment portfolio.

• Find a property being sold by a highly-motivated seller
• Do a check on the property such as the health of the suburb, as well as an area’s average time to sell, clearance rates and capital growth cycles and trends.
• Do a market value estimate for the property based on the tools and resources at your disposal
• Evaluate the market history for the property, such as finding out the agents that listed the property, put it up for auction, or whether the selling price has been lowered previously.
• Assess comparable sales data relative to similar properties around it and if the discounted rate offer is a good deal or not.
• Establish a forecast of cash flow in the short and long term, as well as capital growth targets to determine if you may be able to afford operating or to hold the property without impacting your investment portfolio.
• Determine your maximum purchase price based on your research and assessment of the property.

With the right strategies, you’d be able to realise achieving your property investment goals.