Investment Property Purchase Case Study #2: Adelaide

In early 2020, we started exploring the property market of Adelaide. Being a capital city, the economy is highly diversified but has suffered from a long term decline in automobile manufacturing. However, the major drivers of tourism, hospitality, manufacturing, mining, education and healthcare still remain. Given the tightening market and more than a decade of slow growth, we think Adelaide was ripe to see large gains in the next cycle.

Macro themes targeted:

• Vacancy rates were ~1% over the last few years
• Rents were steadily increasing 3% p.a. and rental yields had increased from 5% in 2010 to 6.5%
• Building completions and approvals were low and staying there
• Population growth was steady (driven by overses migration)
• Investor demand was low as prices were steady for an entire decade (following a mega boom where prices went up 100% in the early 2000's)
• Strong population growth of 1-1.5%
• Strong affordability
• Renewal in confidence with large scale investments from the Defence Force and in Steelworks

The target was to buy a 4 bedroom house in the suburb 25 minutes from the CBD with median prices of ~$325k for this type of property. 4 bedroom properties were very scarce in this suburb and had very strong rental appeal. I found a property that was being sold by an investor for $250k who bought the property for $215k two years earlier. With some research, I found that the original purchase was a fantastic price as Adelaide had not grown in value over that period. The property had very strong interest given the price. It was in great condition and would very sell quickly. It was a brick veneer from the 1980's and had a large floor plan on 600 sqm.

I had set up several alerts on realestate.com.au so when the property was listed I was notified immediately. With some research that night, I thought the property was worth at least $260-$270k based on comparable sales. I knew I had to act fast. Within 24 hours I put in a bid for $235k. The vendor already had several offers but these were all conditional. The agent told me the vendor wanted certainty and could go with a lower price if I opted for a 30 day settlement and a cash offer. Given I hadn't seen the property, a cash offer was a difficult pill to swallow but the returns could be equally fruitful. I changed my offer to cash unconditional and whilst the contract was being drawn, I organised a building and pest report stimulateously. I was happy to lose $500 than miss this opportunity. The report came back with no issues the next day, so I signed and went for completion.

This was the first property I purchased without genuine negotiation but I had done my research which suggested I had strong buffer of things going of wrong of about $25k.

Prior access in the contract meant I could advertise the property for rent. My initial numbers suggested $300 per week which was confirmed by several agencies in the area. However, the strong demand and tight market meant that 71 people enquired about the property with 15 groups on the first weekend.

Upon settlement I was able to get a tenant in on the day for $330 per week implying a 7.3% yield for a brick house in a capital city! How awesome is that. The land itself would sell for $250k.

Given the tight nature of the rental market and low supply, the vacancy rate has still dropped during Covid-19

Lessons learned:

1. Research, Research, Research! Being able to act quickly, providing liquidity means that you can save money when you buy!
2. Fundamentals are important! The low vacancy rates of 0.4% in this suburb means that my rental returns are strong and given limited supply, this property should perform very well.
3. Get your house in order. Be ready so can strike quick when the opportunities presents itself!