In property terms, we all know the term ‘property value’ is as commonly thrown around as ‘position position position’ but we’d like to propose another term – ‘Intrinsic Value’. Just showing off with a new buzz word? I promise we aren’t, let’s explain how it works.
The word intrinsic means actual or real. And that’s exactly what the ‘intrinsic value’ of a property is, as opposed to the figure a valuer puts on it which is subject to market fluctuations.
But we didn’t just make this term up, it’s already widely adopted by those savvy stock market investors. This was evident during the GFC where all banks’ share prices dropped, whether they were directly impacted or not. Hence, the Market Value of a Macquarie Bank share dropped from say $50 to $30. If you believed the Intrinsic Value of that share was $50, then buying at $30 gave you a margin of $20 in safety.
So let’s apply this concept to a home purchase, assuming a depressed market:
Market Value $410,000
Intrinsic Value $495,000
Margin of Safety $85,000
Note too that in a flat market you will have the best chance to negotiate, giving you an even greater margin of safety, and therefore better equity when the home’s Intrinsic Value reaches the Market Value….ergo one very happy investor!
On the flip side, just as important to understand, is that a property’s Intrinsic Value may be BELOW the Market Value, at which time put your wallet away and run!
I know, I hear you saying ‘that’s all well and good, but how do you determine what the Intrinsic Value is’? Below are some key factors:
Position position position
Yes yes that oldy, but in this case, we aren’t referring to ‘elevated position’ or ‘close to shops’ but rather the areas that will provide the best capital growth…without that, we’d all go and put our money into Van Gogh paintings! And sure, capital growth is always going to be unpredictable, but there are some stand out indicators:
- Good population growth in an area to support ongoing property growth
- The amount of successful and diverse industries supporting the area
- Affordability into the future by analyzing current land prices versus income levels
- Supply and demand. When demand outstrips supply you get capital growth. This may be influenced by lack of water, sewage, road access and other amenities keeping up with population growth, which slows down development
You may be surprised to know that some larger regional towns represent great investment opportunities, taking into account the factors above, and may also be more positively geared than the major centres.
Boom or bust
It’s a commonly held belief that the time to invest is when a market is booming. You know the deal, it’s all over the news, it’s discussed over business lunches, and there’s construction on every corner. To run the risk of being unpopular, we don’t subscribe to this theory. In a booming market there’s more competition (giving you less chance of a good deal), often quickly leading to an over supply which will eat away at your return before you can say ‘bust’! Bottom line, the intrinsic value is less.
To the contrary, getting into a market BEFORE it booms gives you negotiating leeway, a higher margin of safety and of course better profits when the market goes up!
Remember, behind every boom there is a bust, and behind every bust there is a boom!
It’s Data Driven
We use a propriety Score Index to help us identify where to buy, taking into account over a dozen different factors such as rental vacancy rate, current stock available, economic data and even local employment.
See, It’s not all smoke and mirrors after all! If you’re busting to get into property or indeed buying another property, contact us to find the perfect one that meets our rigorous scoring process and will give you the best intrinsic value proposition. Our team can even negotiate the right price for you!
Summary:
The intrinsic value of a property is a clever way of ensuring your property investment is going to give you good equity into the future. Here’s how you do it:
- Position, position, position – not ‘near to shops’ but key factors that mean an area has good capital growth potential. It may even be a regional town!
- Boom or Bust? – think you should dive in when the market is booming somewhere? Think again! Remember, behind every boom is a bust and behind every bust, there is a boom!
- It’s data-driven. Using our unique Score Index, we save you a bunch of time by rating properties on Intrinsic Value by extensively researching a range of factors.
Contact us today to find out where your next property investment dollars should best be spent!