Agile v idle property – which one is for you?
So . . you’re across the terms passive versus active investing, and cash flow versus capital growth strategies . .but what on earth is this new term agile versus idle property?
Firstly . .let’s get some definitions sorted.
Passive investing – an investment strategy aimed at maximizing returns by minimizing buying and selling.
Active investing – refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their investments’ performance to exploit profitable conditions.
Cash flow property strategy – involves investing in properties with high rental yield potential and a rental income that is greater than the total expenses of holding the asset.
Capital growth property strategy – involves a primary focus on properties where the value or purchase price is increasing at a faster than average rate.
Positive gearing – is a ‘financial structure’ (not a strategy) where money is borrowed to invest and the income from the investment is higher than the investment’s interest and other expenses. This means an investor will have extra money in their pocket but will have to pay tax on the additional net income.
Negative gearing – once again is a financial structure not a strategy, and involves borrowing money to invest where the income from the investment is less than the investment’s expenses. This is common for property investments, for example, where rental income is less than interest and other expenses. Essentially this means an investor is making a loss.
New market = new market terms?
Until now, the definitions above have typically been used to help investors formulate their strategies and make their purchases. However, there is both real and hyped information indicating that the property market and investment landscape is changing and along with it the need to introduce new market terms.
You don’t have to look too hard to find stories about how the property market is changing. After five years of strong growth, the larger markets of Sydney and Melbourne are starting to pull back. It’s important to note the slow down isn’t in every suburb or in every property type, but generally if you’re a buyer it’s time to start celebrating because your opportunities are spreading.
On top of changes to price growth, ‘property’ changes include adjustments to zoning, design, building codes, and building materials. Innovations and adjustments are constant, however recent changes to planning legislation and zoning represent great opportunities for property owners. Couple this with increased infrastructure activity, job growth and demographic changes and it doesn’t take much to see a new landscape emerging.
Even though the range of opportunity is growing, as a buyer you’re still faced with the dilemma of selecting the best property to buy. At Crave, we use more than 60 data points to evaluate properties and help our clients select the best choice for them. We also use a new property classification which involves identifying whether a property is agile or idle.
Agile property classification
Basically, a property in the agile class would be one that gives rather than takes, a property that performs no matter what the market is doing, a property that will continue to adapt and produce as time goes by. Just like the definition of agile, agile property is limber and flexible in that it can be changed to take advantage of market opportunities to optimise benefits.
- two bedroom house with the opportunity to add an extra bedroom / range of rooms by adding to the back, splitting a room, or going into the roof
- small house on well zoned block – complete knock down and rebuild extra structures
- unit in older block – opportunity for cosmetic renovation, or option to knock down and build double the amount of units
- commercial property with the ability to change and optimise use or add an extra income stream
- property (unit or house) on block large enough to split off side or back block
- property located in coveted destination location with opportunity for seasonal higher rents.
Agile properties will ideally be cash flow positive or very close to it, can be at any budget point and size, and can be found in a wide range of locations. Specifically, agile properties will enhance a buyer’s ability to continue to build their portfolio or buy more when it’s appropriate for the owner.
Idle property classification
A property classed as idle is the opposite of agile. An idle property ‘takes’ rather than gives – that is, it costs money to own it; there is no real upside, no opportunity to add value, is vulnerable to changes in the market, will not stand on its own if the owner wants to travel or take a work break, and one where the owner will have little control over the property’s performance. Other descriptors include properties that are unproductive, useless, and hollow in that it has limited potential to increase in value along with limited scarcity or buyer demand.
- units typically purchased in an ‘off the plan’ process located within a large block (10 or more units) near other large blocks
- houses or ‘duplexes’ in new estates built on small (minute) blocks of land and surrounded by vast areas of greenfield / undeveloped land (where thousands more similar properties are scheduled to be built)
- a town house in a large complex of town houses.
Idle properties will often be purchased using a negatively geared financial structure, with the purchaser sold on using depreciation to ‘save on tax’. Idle properties put the buyer in a bad financial position and leave the buyer worse off than they would be without the property. Some will argue they can purchase an idle property at a bargain price (hello multi-sold ‘off the plan’ or house+land package), however even this is unfounded logic due to the cost of not purchasing (the opportunity cost) an agile property using the same funds.
The dark side
Considering property through the agile v idle lens will provide some protection for the rise of the dark side of the property industry. In suburbs where there are more sellers than buyers, we will see hard core spruikers work forcefully to draw in the unsuspecting public, and entrap buyers into a purchase that may destroy their financial future.
Note there is a difference between agents and developers who sell quality new builds, as opposed to ‘floggers’ who funnel buyers into a limited range of choice. So how do you recognise the members of the dark side of the industry? It’s surprisingly easy . . just follow the money. If your ‘advisor’ is paid by commission, they cannot – by definition – have your best interests at heart. Sure, they may present as ‘really nice’ people but they are either misguided or just plain shonks.
By definition, anyone paid a commission to ‘recommend’ a property will only show you properties where they receive a commission, or worse . .they will be influenced by the highest amount of commission in order to present a buyer with a shortlist. This means the buyer will not be shown the full range of properties available and will often pay a premium to cover the ‘advisor’s’ commission. There’s two checks you can run if you find yourself pulled into this vortex.
- Ask the ‘advisor’ to show you a comparable property where they aren’t receiving a commission.
- Run a simple search on any property platform – such as realestate.com.au or domain.com.au – to get price comparisons and insights into the amount of stock on the market.
Outlined below are characteristics of two professional roles (real estate agent and the qualified advisor) and characteristics of those operating on the dark side of the industry.
Recent revelations coming from the banking industry royal commission should be evidence enough to show the murky depths an industry can fall into when performance is based on commission. The property industry has taken steps to weed out unscrupulous operators, however the final decision will remain with the buyer as to whether they will be duped or not.
A point of clarification
Thankfully, news is filtering out about the dangerous of aspects of the industry. Some buyers try to protect themselves by avoiding ‘new’ property and just focus on existing structures. This approach may protect buyers, but not all new property is ‘bad’ or will fail to perform. It is for this reason we developed the agile / idle classification.
The other point of clarification we always explain to our clients is that property performance is dependent upon the owner as well as the property’s features. For example, I’m an experienced renovator and aim to restore properties rather than knock them down. Due to my experience, I can squeeze more performance out of a property than someone who doesn’t have the time or interest in renovating a property. Therefore, levels of agility will vary when considered in light of the buyers’ skills, needs and aspirations.
Benefits of agile over idle
As a buyer, considering any property through the lens of the agile versus idle property classification will go some way to protect you from a bad purchase. Focussing on agile property types will put you in a position to continue to buy with a view to building a portfolio that is resistant to market downturns.
Crucially, filling your portfolio with agile properties will provide you with the ability to efficiently pay down debt, sell off components or just let time do the work so you can live debt free. Some proponents of idle property will argue you can do this with idle property . . however you would need to buy at least double the amount of properties at comparable price points to achieve this. Not only are there increased costs associated with this approach, but also an increase in time to purchase and manage the properties, as well as increased risk.
Properties classed as agile will perform in any market. Of course, good property can be turned bad by doing the wrong thing to it – for example, selling too quickly or spending too much on a renovation. The truth is that investors with successful and resilient portfolios have purchased properties in the agile class. If you would like to know whether the property you’re considering is agile or idle, don’t hesitate to make contact.
Other information on this topic is included in the following links.
Buy smarter = limitless ways to build lifetime income
Crave Property Advisory is a unique property strategy and buyers agent service. As the only independent and unbiased advisory that can help you use any property strategy Australia-wide, Crave’s services extend to home, investment and commercial property. A highly client focused organization, Crave developed the Modular Investing System (MI System) to provide clients with the ability to use a tailored mix of strategies and efficiently build profitable portfolios that create lifetime income.
Debra Beck-Mewing is the CEO of Crave Property Advisory, and has more than 20 years’ experience in property investing, Australia-wide. She has used a range of strategies to build her property portfolio including renovating, granny flats, sub-division and development. Debra is skilled in identifying development opportunities, and sourcing properties that have multiple uses and multiple exit strategies. She is a Qualified Property Investment Advisor, licensed real estate agent and also holds a Bachelor of Commerce and Master of Business.
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Disclaimer – This information is of a general nature only and does not constitute professional advice. We strongly recommend you seek your own professional advice in relation to your particular circumstances.
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