6 Steps To Overcoming An Investment Setback
What do you do when an investment doesn’t work out as planned? Do you give up on your goals? Do you lose your confidence? Do you stick your head in the sand?
Most of us at some point have experienced a financial setback or in some cases even a disaster!
I have had my fair share of setbacks and this week I will share with you why your mindset is the first step to overcoming these challenges to continue building a profitable portfolio.
Watch here for my 6 essential tips to turn your financial setbacks into success.
Follow-through habits for investor non starters
Property investing isn’t just for people with a truckload of cash or equity, yet these are some of the reasons why people (perhaps you) don’t get started in investing or continue growing their portfolio.
I have seen hundreds of clients start investing with only a little bit of money and now own portfolios in the millions, myself included.
Then there are those that do all the research in the world. They’ve read the books, the magazines and the reports which is all great but when push comes to shove they get stopped.
Taking some time to research, attend events and learn new things are good habits to get into for taking action. Arming yourself with education will overcome many of the hurdles that will prevent you from doing something in the future.
If you want to be successful at anything in life though, you have to take action and, wait for it… follow through.
The world’s greatest entrepreneurs, investors and business people share this problem between starting and learning new things and the habit of finishing and following through.
Here are my four top tips for taking action:
1) Check your finances
You have to know where you are now to be able to move forward. This can be as straightforward as listing your assets, liabilities, income and expenses or it may include needing to set up new tax structures or a self managed superfund. This will give you a great idea of what you have available to invest and also prevents you from not taking action assuming you can’t afford to invest.
2) Use the services of a financial planner or adviser.
These professionals main goal is to make you money and guide you in your financial decisions. They have a wealth of experience and more importantly, they have a financial stake in your success. You don’t have to know everything. Trust the experts.
3) Define completion and set realistic goals
Whether you want to set goals for retirement, where you want to live, the car you want to drive or where you want to send your kids, you need to practice wearing blinders and not get distracted from your goals. More importantly you need to set a deadline as to when you want to achieve these and then you can work backwards.
PS: You may have seen me recommend a great goal book called “five”. This is a fantastic resource for getting clear on where you will be in five years’ time and if you haven’t got your free copy yet do so here.
4) Be ahead of the herd!
The herd instinct is the idea of just doing something because it seems everyone else is. The most successful investors do uncommon things that other investors overlook.
Invest in opportunities when other people are scared to act. In 2008, when the housing crisis hit, the stock market fell thousands of points in the short space of a few months. The smart investor who invested after the market bottomed out would have gained significantly when the markets eventually rebounded. This will assure you are always seeking opportunities to take action rather than waiting for others to lead.
Market conditions change all the time, so your strategies need to be flexible enough to change with them. Remember, this doesn’t mean pausing and stopping taking action!
Is it safe to buy off the plan? What you need to know to mitigate risk – Part 2
My blog last week looked at what you need to know about the developer and contract of sale when considering an off the plan property investment.
So what about financing an off the plan property? And how do you mitigate market risk?
1. What happens if I can’t get finance when I’m required to settle?
This is where many investors get caught out with buying off the plan. Once you have entered into the contract, you are required to settle by the agreed date. If you can’t fulfill this commitment you may be forced to sell (potentially at a price lower than the original contract price) and could risk being sued by the developer.
Make sure you’re fully aware of the following before signing on the dotted line.
- Obtaining pre-approval can be challenging. Loan pre-approval from your lender will be required for you to complete the contract of sale with the balance due at settlement. Banks are conservative and won’t lend for something that doesn’t yet exist. They are typically only willing to expose themselves to a certain number of off the plan developments so this can restrict your ability to get pre-approval from certain banks. Because the property doesn’t yet exist, obtaining pre-approval can be challenging when it comes to buying off the plan.
- Your pre-approval may not stand until settlement. The banks will usually impose additional conditions on off the plan pre-approvals because of the ‘unknowns’. These include market movements, interest rates, your personal financial situation etc – all of which can change in the time it takes for the project to reach completion.
The bank may impose a time limit on the validity of your pre-approval and will conduct another review of your financial position when the actual loan is required. When they do lend, which will be close to completion date, finance will be based on the value of the property at completion, usually at a loan to value ratio of 80% – 90%. This means if the market has dropped and the value of the property is less than it was when you signed the contract, you will need to find other ways to fund the shortfall – unless you’re able to obtain a better valuation from another bank.A shortfall situation can usually be avoided with careful market research but it’s still wise to be prepared. Aim to have l0% of the property’s value on hand (in cash or equity) by settlement so that you are not caught short in the event of a market fall.
2. Is there going to be demand for my property when construction is complete?
Market research when buying off the plan follows the same principles as any other property investment. It is absolutely an essential step in the buying process to ensure you’re not going to be left with a property you can’t rent out or a loan that’s greater than the value of the property.
Assess the supply pipeline in the area and the drivers of population growth, and then determine whether an undersupply or oversupply is likely. Two key areas to investigate:
- What else is being built in the area? Look at other developments under construction or in planning and compare location, developers, price, quality etc. Investigate the quantity of development and what impact this supply pipeline will have on future demand.
- Who makes up the rental market and will your property be appealing? Understand who makes up the rental market in the area and make sure your property (both in terms of quality and location) will be desirable to this demographic. Professionals, students and empty nesters – the three main groups that make up apartment dwellers will all have different requirements and expectations.
3. Is the property a fair price?
Based on the above research, do you feel the developer is asking a fair price for the property? Prices for off the plan apartments can be over inflated.
Don’t be afraid to open negotiations and back up them up with market data and comparisons with similar properties.
You may not be able to get them to move much on the price but asking for furnishing and appliance upgrades and packages, a share of the interest earned on your deposit or a rental guarantee on completion are a few ways that you could sweeten your deal.
Don’t discount off the plan investments, just be smart!
Get a lawyer experienced in off the plan contracts to review yours in detail. Off the plan contracts will always, unsurprisingly, favour the developer.
Be absolutely informed about what you’re getting into. If you feel 100% confident about the quality of the build, market demand and your ability to cope if things go pear-shaped, then there’s no reason to avoid buying off the plan!
Is it safe to buy off the plan? What you need to know to mitigate risk – Part 1
For many property investors, buying off the plan is one of the most easily accessible and affordable options for getting a foot on the property investment ladder.
Unfortunately, oversupply issues and criticism over the quality of some developments are rife in the current marketplace. It’s not surprising that investing in property off the plan has developed a reputation for being high risk.
So, is it safe to buy off the plan? It certainly requires another layer of due diligence. But with education, thorough risk mitigation, attention to detail and professional advice, it can be a rewarding investment strategy. Here’s why:
What are the benefits of buying off the plan?
· Low cost entry point – You’re able to secure the property with just a deposit and finance pre-approval. The balance isn’t required until settlement giving you plenty of time to prepare.
· Lock in the price – Secure the property with just a deposit and benefit from the capital gains during the construction period in a rising market. (Of course, the opposite is also true – the market could fall leaving you at a loss – so this is where market research comes in).
· Stamp duty exemption or reduction in some states – Depending on the state, type of property and value, you may be eligible for a stamp duty exemption or discount.
· Maximise depreciation tax and minimise maintenance – Because the property is brand new, you’ll be able to take full advantage of depreciation tax, and will have minimal maintenance costs – all helping to boost returns.
While this all sounds pretty good, it counts for nothing if you don’t do thorough due diligence.
How can you mitigate risk?
So how can investors take advantage of the benefits of buying off the plan and avoid getting themselves into trouble?
The due diligence process for buying off the plan is different and more involved than that of an established property.
These are the questions you need to be asking:
1. Is the developer reputable?
Market risk aside (because that is a factor in any investment), off the plan is considered a risky strategy by many investors primarily because there’s nothing built yet. You are investing in a promise – that is, that the developer will deliver what they say they will deliver.
What you need to know about the developer and sale contract:
· The quantity, design and quality of their previous projects
· The quality of the floor plans, fittings, finishings, appliances, and parking options (will they appeal to prospective tenants?)
· If the specifications of all the above are clear in the sale contract and the process for rectifying defects is clear.
· Whether there are options for customising floor plans and fittings. Depending on the rental market in the area, this may help you add value and attract higher quality tenants.
· Whether the architect, and the construction company undertaking the build, have sound reputations.
· The workmanship and products will be of high quality with suitable warranties.
· The developer can demonstrate solid financial strength and a track record in delivering on schedule.
Don’t be afraid to ask them directly for this information. Just make sure you also do your own research – online, by visiting previous developments, and talking to the residents – to substantiate their claims.
Usually, you will inspect the property prior to settlement to advise if there are any issues with the quality and discrepancies between what was promised and what was delivered.
2. What insurance does the developer have in place?
The developer is legally obliged to have home warranty insurance in place although there maybe some exemptions to this depending on the state and building type. For example, buildings over three storeys maybe exempt, and single level stratas may be exempt if construction hasn’t started.
If a home warranty certificate isn’t attached to the contract, ask the developer why and consult your lawyer.
3. What rights do I have if the developer doesn’t meet its contractual obligations?
Sometimes the finished product will not match your original expectations. It’s important to understand your rights and the rights of the developer, and ensure these are clearly stipulated in the contract.
Issues that may arise:
· The specifications of the completed apartment are different from the contract/display unit. Bear in mind that the plans you sign off on may not have been council-approved yet and the developer will retain the right in the contract to make modifications to complete the project. The specifics of the developer’s rights should be detailed in the contract and any modifications made should not impact the value of the property.
In the event that changes do impact on the quality and value of the property, make sure the contract allows you to withdraw from the purchase and obtain a refund on your deposit. You can ask for these conditions to be added to the contract if they aren’t in there.
· The project’s completion date is delayed. The contract should state when the project is due for completion. It will also give the developer some flexibility – typically another year – if things aren’t running on schedule. If the developer fails to meet this extended timeframe, then it should state in the contract that you are entitled to a full refund of your deposit.
· The project collapses. In the unfortunate event that a project collapses, you need to make sure you will get your deposit back. Deposits should be held in a trust account which guarantees its security if things go pear-shaped for the developer. It’s also worth checking who gets the interest earned on your deposit while it’s in the trust account – you may be entitled to a 50% share. It’s something worth negotiating for during the sale process.
Part 2 of this blog, out next week, will look at off the plan financing and assessing the market.
Are our capital cities facing an apartment oversupply?
There’s concern in the marketplace at the moment over the prospect of an apartment glut in some of our capital cities. While Melbourne has been at the centre of discussions for some time, now Sydney and Perth are finding themselves the subject of media articles on apartment oversupply.
Australia as a whole is well known for having a housing shortage, which is why property is typically seen as a sound investment.
So how can we now be facing an oversupply? Well, in short, it generally comes down to whether the right type of housing is being built in the right areas. Large apartment blocks bring plenty of accommodation to market. But small flats in the CBD only appeal to a certain demographic. Is there enough demand from single professionals and students to fill them?
New and off the plan apartments are appealing investments. They offer a host of benefits: affordability, the option to secure a property with just a deposit, minimal maintenance and the ability to maximise depreciation claims, to name a few.
Some areas, such as inner Sydney, have also delivered impressive capital growth in recent years, returning 12% on average over the last 12 months according to RP Data.
It’s easy to see why investors are drawn to these opportunities. So, should you be considering these types of investments in the current market or are you wise to stay away?
What’s happening?Inner city apartment development has gone into overdrive in Melbourne in recent years as developers have sought to capitalise on the population boom that was fuelled by overseas and interstate migration. Unfortunately, the now slowing population, coupled with many inner city complexes poor reputation for quality and below-standard floor space, has resulted in a glut.
Consequently, price growth in the Melbourne market has been poor, declining more than 2% over the past 12 months and vacancy rates are at 4.6% (SQM Research).
What can we expect? The outlook from BIS Schrapnel’s latest housing report isn’t rosy with continuing poor capital growth and vacancy rates predicted to rise further over the next 12 months.
What this does suggest is that the market is bottoming out. The next couple of years may provide investors with an opportune time to buy in low before the market turns. Selecting quality properties from reputable developers will be key.
What’s happening? Sydney’s inner city apartment market is caught in the middle. On one side there are those who are confident the market will remain undersupplied for at least the near to medium term. On the other, there are those concerned over the influx of Chinese developers and the growing pipeline of supply.
Currently, there is still strong demand from young professionals and students – plenty it seems to absorb supply. However, it could be a different story in a couple of years.
What can we expect? BIS suggests that the level of supply hitting the market combined with affordability issues from skyrocketing price growth could see a price decline in 2016. As I have discussed frequently in my blogs, understanding how to read property cycles is essential to maximising returns. Consider where Sydney CBD apartments are at in the property cycle and what returns are likely before it peaks and enters decline.
What’s happening? Perth has also experienced a surge in inner city development in recent years driven by the resources boom and the ensuing large workforces.
Unfortunately, the mining downturn is now having the opposite effect – rising vacancy rates (sitting at a very undesirable 9% for city units according to RP Data) and slowing price growth have been well reported.
What can we expect? Perth as a whole certainly appears to be trending downwards and BIS forecasts this trend to continue for at least the next three years. As with Melbourne, this presents an opportunity to buy in ahead of the next upswing. Agriculture is tipped to be the next driver of economic growth in WA and investment in civil infrastructure, particularly in inner city areas, will create a highly desirable lifestyle that will help drive the next boom cycle.
For investors already in these markets, a long term strategy is required, with the possible exception being Sydney where some capital gains could be realised in the next 12 to 24 months if nimble investors keep their finger on the pulse.
For those ready to invest now, I would suggest keeping your eye on the Perth and Melbourne apartment markets over the coming months and re-evaluate the situation in 12 months time. In 2014, consider other housing types and locations where demand drivers are more favourable.
The 4 mistakes that made me a better Investor
As a young, inexperienced investor, I made my fair share of mistakes in the early years of my property investment journey. Sure, I’d read plenty of books, but with no personal mentor to guide me, I had little idea of what I was really in for when I began my ‘real life’ investing.
Making the mistakes I did and learning from those experiences provided the foundations of my investment coaching capabilities today. I’m now able to share my experiences with others so they can learn from them. However, my journey would have been a lot less painful had I the resources that are available to investors today!
After more than 10 years investing in property, these are my top four ‘Don’ts’ to avoid.
If you can avoid making these mistakes, you’ll find the path to reaching your goals much shorter and smoother!
DON’T buy with emotion
Among my first purchases was an amazing ocean side home. I had visited the property as a guest and was immediately taken with it. I said to myself that if it ever came up for sale, I would buy it, no matter what. Well it did. And I bought it – at well over the asking price. Straight away I had a severe case of buyer’s remorse. I hadn’t done any due diligence. I hadn’t done any number crunching. I had bought purely on emotion.
It’s essential that you treat investments for what they are – assets that are there to make you money. Completing thorough due diligence and calculating projected returns on every potential investment is the only way to minimise risk and maximise return.
DON’T fail to investigate the best structure for your investments
This is a common mistake to make and one that can cost you thousands in tax each year. It was a valuable lesson that, unfortunately, I learned the hard way!
Before you invest, you need to consider what legal structure will own the property. The most suitable structure will usually depend on your investment strategy – are you investing for tax minimisation, retirement planning, capital growth, cash flow? Are you looking to invest for the short term or long term? Are you building assets to pass on to family? Answering these questions and discussing with your accountant and/or financial advisor will ensure you structure your investments correctly from day one.
For example, positively geared property might be best held in a trust to minimise the tax you pay on the annual cash flow profit. Negatively geared property, on the other hand, might be best held in an individual’s name, which will allow you to claim the tax benefits (Please note: this should NOT be taken as financial advice. Please speak to your accountant or financial advisor to determine the best structure for your personal circumstances).
DON’T buy at the top of the market
For many investors, it’s easy to get caught up in the hype of a rising market. Many times I jumped into property in a market where prices had been rising for more than two to three years. This isn’t the best purchasing strategy if your looking for short term growth to help fund your growing portfolio.
Learn how to read the property clocks of the areas you’re interested in investing in to identify the market troughs and peaks. This will enable you to buy in at the low points to maximise returns, and help you to avoid buying in at the top when the capital growth curve is reaching its peak. You can watch my video blog here on property cycles.
DON’T over-leverage your portfolio
The ability to release equity from a portfolio to continue investing is one of the greatest wealth-building advantages property investment offers. However, this should not be undertaken without careful consideration. Refinancing loans to release funds can result in an increase in your interest payments. You need to consider whether you can service them!
After becoming comfortable and reaching a medium sized portfolio, I quickly diversified into coastal land sites and even a small subdivision. While exciting, these projects were very capital intensive and soon drew substantial funds from my portfolio as I released equity to develop. In some cases, I even lost money. This put strain on my serviceability and therefore my ability to grow the portfolio further. I was forced to sell a number of sites and projects to stabilise my portfolio before I could begin building it again.
DON’T get complacent
All investors can be guilty of this – myself included. Once you get comfortable with investing, it’s easy to get complacent. You forget about the impact of interest rates, forget about thorough due diligence, forget to review your portfolio regularly and fail to act swiftly in changing markets.
This is where it’s important to retain some of those qualities from your beginner investor years – the hunger and acute awareness! Experienced investors can easily fall into the complacency trap which can ultimately cost you your success. So stay keen, hungry and involved!
Understanding investment options – the difference between negative, neutral and positive cash flow property
Before embarking on your property investment journey, it’s important to understand how different investment options deliver different capital growth and cash flow outcomes.
It’s not uncommon for investors to jump into an investment without considering whether the type of return it’s offering is the right one for their personal financial situation and wealth creation goals. I learnt this the hard way early in my investment journey and it took me years to get back on track!
According to ATO data, the majority of property investors investing in negatively geared property fall within the lower tax brackets. Given negative gearing is a tax minimisation strategy first and foremost, are these investors really on the right path?
What is negative cash flow property?
In a nutshell, negative cash flow property or ‘negative gearing’ is defined as when the interest and holding costs you are paying on your investment property are greater than the rental income you receive.
The appeal of negative gearing is that it allows you to deduct the losses you have made on the property from your annual personal income (under current tax legislation), thereby reducing your taxable income and the prescribed tax you’re required to pay on that income.
Frequently the subject of much debate, negative gearing was introduced to encourage investment in property with the idea that this would increase the supply of rental accommodation throughout the country. Whether it has been successful in doing so is debatable but the advantages of negative gearing from a tax minimisation perspective cannot be denied.
What many investors don’t fully understand though is that the tax savings rarely cover the cash flow losses, leaving you with less cash in your pocket each year.
The underlying investment case for negative gearing is based on the premise that each year the property will have grown in value, which provides the return. With a long term outlook, over time gradual rental increases will eventually see a negative property reach a stage of neutral and then positive gearing. However, it’s important to remember that capital growth year on year is not guaranteed and your return is only fully realised when the property is sold.
Who benefits most from negative gearing? Investors who typically gain the most from negative gearing are high income earners – those in the higher tax brackets are those best placed to maximise the tax benefits. Further, higher earners can afford to have less cash in their pocket every year and are generally content with taking a long term approach to building assets through capital growth. Their long term goals may be to turn their negative properties positive for retirement cash flow, create a portfolio of family assets, or to liquidate and pocket the profit.
Who doesn’t? Lower income earners considering negative gearing should investigate the pros and cons carefully to determine what benefits negative gearing will really provide. After all, investing is about the return, and until you sell the property, the return is not realised. You will need to weigh up whether you’re better of having that extra cash in your pocket each year – rather than waiting for a capital return that may not bear the fruits you had hoped for.
What is neutral and positive cash flow property?
In contrast to negative cash flow property, neutral or positive property doesn’t leave you out of pocket.
A neutral cash flow property means the property is making neither a profit or a loss each year because the loss is balanced out by the rental income. Hopefully the property is generating capital gains, and it will likely become a positive cash flow property if rents rise and/or interest rates fall.
A positive property is one that that generates you an annual profit because the rental income exceeds the property’s annual holding costs. Tax will be payable on the profit but can be miminised by maximising your eligible deductions such as depreciation.
Who benefits most from positive gearing?
Positively geared property can be advantageous for most investors. The extra income stream can replace or supplement your salary, allow you to retire early, improve your lifestyle etc. It can be particularly beneficial for those on lower incomes who are looking to replace their current salary, or that of their partner’s, so that they can give up work to focus on family or other interests. It’s also a good strategy for building a portfolio quickly – the profit from your positive property can be used to invest in another.
Finding property that is positively geared from day one can be challenging as it’s often limited to regional areas.
Many believe that by investing in positive property from the outset they are forgoing capital growth. While it’s true that in many positive property markets, rental yields are high and capital growth is slow, this is not a definitive pattern. Plenty of investors achieve both by making well-researched and informed investment decisions and selecting strong performing positive locations around the country.
Can a negative property turn positive, and vice versa?
As touched on above, a property that was originally negatively geared can turn positive if it’s a long term investment. Over time, rents will rise, interest rates may drop or you may pay down some or all of the principal (thereby reducing or cutting your payments).
Eventually, the rental income will become equal to or greater than the costs of holding the property – turning it neutral or positive. This is often the long term strategy of negative gearers who see it as a retirement plan – an asset that will provide them with cash flow during retirement.
Unfortunately, the opposite is also true. A property that was originally positively geared can turn negative in the event of a rental market shift and/or interest rate rise. Both cases typically need to be quite extreme to put a property into the red – it’s more likely that your profit will decrease rather than disappear. This, of course, is not ideal either.
Investors – whether positively or negatively geared – are encouraged to plan for these situations to minimise the impact if they are faced with one. With some simple preparation – i.e. ensuring you have emergency funds put away – you will be well positioned to ride out tough market conditions.
Should I invest in negative and positive property?
Portfolio diversification is very important for risk reduction. Many investors find that a balance of negative and positive properties gives them exposure to a range of markets and doesn’t leave them with a cash flow problem. Investing in well-located negative and high returning positive properties is an ideal overall strategy for achieving the best of both worlds – growth and passive income.
How long does a property market take to run full cycle?
A regular question I’m asked is ‘How long does a property market take to run full cycle and how can I pinpoint the bottom of the market?’ My answer generally depends on whether it’s a capital city or regional location as the two can be very different beasts.
Understanding how the two differ and learning how to recognise the various stages in the cycles are key to getting comfortable over when to get in and when to sell.
Falling or flat markets often scare investors away as they give the misconception of poor performance. Rather, informed investors know that this can be an indication that a market is at or may be reaching the bottom of its cycle. Markets showing years of little or no growth can present exciting opportunities to buy in at the bottom of a market cycle and ride the capital and rental growth curve as it trends back upwards.
So, what IS the difference between a capital city cycle and the cycle of a resources city or town?
Regular market movements are commonplace in resource towns and the market cycles and annual fluctuations differ greatly from those seen in capital cities.
The housing market in a resources town can turn a full cycle in as little as two to three years, as it responds to infrastructure and economic development activity in the area. During a down cycle, prices and rents may roll back as much as 25% before the market moves through its cycle and begins its upwards swing.
In contrast, capital cities generally experience a full market cycle every seven to eight years with prices and rents detracting by up to 15% on average.
What this means is, investors have an opportunity to take advantage of the more frequent and pronounced growth cycles in regional areas to generate greater returns more quickly.
How do you know when a market has reached its bottom?
News reports in the media are great at telling us when a market is in steep decline, or when it’s booming. However, pinpointing when a market has reached its lowest point can be very tough as we never know the bottom has been truly reached until the market shows a consistent rise again!
This is where market research comes in. It is critical in determining what the growth drivers are for a particular area and when those drivers are likely to come in to play. Check out my recent blog on how to conduct market due diligence here (which applies to both regional and city areas).
Buying in ahead of a boom always requires some risk-taking. Industrial projects can, and do, falter from time to time which consequently impacts the demand for housing in the area. While the greatest returns in resources towns are often made by those who invest before the large infrastructure projects receive final approvals, investors should exercise caution and consider both the best case and worse case return scenarios. Get the timing right though, and you have truly led the pack and uncovered the next boom market ahead of the rest!
Capital cities also experience up and down swings but they are more gradual and less pronounced due to their population size and industry diversification. And while, as a whole, capital cities will experience a broad cycle, suburbs within it can behave differently to the broader market trend.
This means that while the city as a whole may be trending down, you will still find certain suburbs within it weathering the storm. This makes research into capital city suburbs just as important as regional towns.
When should you sell?
Each and every investor’s personal situation is different and the answer to this will depend heavily on your personal circumstances and financial goals.
While it’s true that many investors see resource towns as short term capital growth investments – getting in before the upswing and getting out before the downswing – these are fundamentally positive cash flow markets which provide ongoing opportunities for cash flow and capital growth over the long term.
When taking a long to medium term view of investing it’s important to ensure you’re financially positioned to ride out the downturns during periods when rents and equity drop.
The advantage of positively geared markets however is that yields can typically remain high enough to cover the property’s holding costs during down cycles which can help insulate investors portfolios and repayment ability.
Rather than focus on trying to pick the exact bottom of a marketplace before committing, I suggest doing your research and identifying a location with sound dynamics and growth prospects – if the market has performed well in the past, been through a decline and levelled out in recent years, chances are it may be poised for a recovery.
Where to find Australia’s best High Yield capital city suburbs
Last week I looked at three regional towns currently delivering strong rental yields with good prospects for future capital growth. This week’s blog highlights three capital city areas with promising investment profiles for strong rental return and capital growth prospects.
Units, over houses, are generally performing better across the board in capital cites.
Brisbane – City
· Yield: up to 7% (units)
· Vacancy Rate: 4.5%
· Growth (1yr/3yrs/5yrs): 0.11%/3.33%/1.09% (units)
Sources: RP Data, SQM Research
Why Invest: The Brisbane market has now entered its next growth phase after a period of decline. Investors have the opportunity to buy-in at very affordable prices, considerably less (up to 45%) than the Sydney and Brisbane medians for quality inner city units.
Brisbane has been undergoing transformation in recent years and along with fantastic weather now counts world-class culture, entertainment and dining options among its draw cards. It’s also investing heavily into infrastructure with $132 billion of projects planned between 2010 and 2014, with a significant focus on improving transport.
Queensland is also one of Australia’s most resources-rich states with a massive LNG export industry that’s only in its early phases of development, further strengthening the state’s industry with significant flow-on effects to Brisbane.
Top tip: Investor demand is most definitely on the rise in Brisbane – apartment sales in 2013 almost doubled that of 2012. Get in now and make the most of the current affordability and opportunity to maximise growth. Look for boutique apartments with unique features.
Risks: Apartment oversupply is an issue in Brisbane, as it is with many Australian capital cities. This could result in slow rental and capital growth, and high vacancy rates in the short to medium term until supply is absorbed.
Sydney – Western Suburbs (e.g. Whalan, Mt Druitt, Lethbridge Park)
· Yield: 6-7%
· Vacancy Rate: 0.7%
· Growth (1yr/3yrs/5yrs): 15%/35%/34% (Averages)
Sources: RP Data, SQM Research
Why invest: Sydney’s market has boomed in recent years prompting investors to look outside the usual inner city areas – which have reached unaffordable heights – to suburbs where they can secure decent sized blocks for renovation or development and where the low buy-in can facilitate good yields.
While not considered highly desirable locations to live in the past, suburbs such as Whalan, Mt Druitt and Lethbridge Park, which all fall within the local government area of Blacktown, have emerged as areas worth further investigation for these very reasons. Despite the LGA’s rapid population growth – a 25% increase over the last 10 years – median property prices range from just $270,000 for a unit to $410,000 for a house across Whalan, Mt Druitt and Lethbridge Park.
They might be 40km from Sydney’s CBD, but transport connections are excellent which is one of the area’s most desirable features. There are direct rail lines to central station and close access to major motorways. Vacancy rates are extremely low at 0.7% and the area is very popular with families.
Top Tip: These outer suburbs are ripe for renovation projects and larger blocks mean the addition of granny flats to increase income are also worth considering.
Risks: Sydney’s capital growth over recent years has been huge and is now slowing. A ‘crash’ is unlikely but investors should be aware that growth will more than likely to be slower than recent years and this is cash flow investment rather than a capital growth investment.
Perth – City of Bayswater
· Yield: Around 5-6% for units
· Vacancy Rate: 1.9%
· Average Annual Growth: 10% (houses and units)
Sources: RP Data, SQM Research
Why invest: It has been reported that slower growth, sales and rising vacancy rates suggest that Perth’s booming property market is softening and maybe reaching – or have already reached – its peak. However, this doesn’t mean good yields can’t be found in certain pockets within the city.
Bayswater council – which includes the suburbs of Bayswater, Maylands, Morley and others – has plenty of highlights. It’s just 7km from the CBD, the Swan river is on its door step, there are excellent bus and rail connections and a lively cultural and entertainment precinct in neighbouring suburb, Mount Lawley.
Top tip: Morley looks to be one of the most interesting of the suburbs within Bayswater due to its recent and future development. Despite not having its own train station, unlike some of the other Bayswater suburbs, it has superb bus infrastructure – the CBD is only around 15 minutes by bus. Major roads are also easily accessible and the light industrial area in Ashfield, under development, is within a couple of kilometres.
In 2011, the $60 million Coventry Square, Perth’s biggest markets complex, opened in Morley, creating a major tourist and entertainment destination.
A masterplan for the further development of the Morley city centre has also been approved. The plans include a new central park, improving public transport, upgrading streetscapes and public spaces, and making streets more pedestrian friendly.
Risks: The Bayswater area has experienced good capital growth in recent years and could slow based on the broader market indications for Perth.
Conduct due diligence like a property expert in 4 easy steps
I’ve blogged regularly on the importance of research and due diligence when investing in property.
Risk is one of the biggest obstacles to investment for many property investors. Everyone has different comfort levels – some of us are prepared to take greater risks for greater returns, others are happy with lower returns if it means lower risk.
Risk assessment is a critical element of the purchasing process, but how many of us really undertake comprehensive due diligence?
It’s common for investors to get caught up in hype or act hastily out of fear of missing out. As a result, they skip over or rush through their market research and property assessment.
For others, a full understanding of the risks, getting comfortable with them, knowing the worst case scenario and how they would deal with it is the only way they can overcome their fear and take the plunge.
Risk evaluation can seem a very daunting thing. I have provided comprehensive lists of research areas in past blogs. This time, I thought I would suggest a more simplified due diligence process to help make it more manageable. I have split this into two parts. This blog covers the first part – market due diligence. The second part will cover property due diligence and will be the subject of my next blog.
Right, you have your deposit, you know your borrowing capacity and you have your investment strategy in place. You’ve done some initial groundwork and, depending on whether you’re seeking cash flow or capital growth, you think you’ve identified some potential markets. Now it’s time for the nitty gritty.
The four questions to ask yourself when doing your market due diligence:
1. What will drive market growth?
For our investments to deliver us strong yields and/or capital growth, we need demand for accommodation in our chosen area to outstrip supply. This requires us to identify some solid drivers of sustainable population growth. Local and state governments often publish economic reports on towns, cities and suburbs which provide population and housing projections and predict shortfalls. This information is useful but make sure you look at what factors they are using to reach these predictions, when the reports were published and if they match up with your own research outcomes.
Look for as many of the following growth drivers as possible. These factors can all have a positive effect on population growth and will greatly improve the growth prospects of an investment:
· Proximity to good existing or planned infrastructure and appealing lifestyle amenities such as public transport, shopping and entertainment precincts, good schools, parks, rivers and beaches
· Urban development and revitalisation projects
· Industrial development – the more projects the better. Exercise caution with single-project towns – if the project should run into trouble the property market will suffer swiftly and drastically.
Where can I find this information? Information on infrastructure and urban development planning can be found on the local council’s website and the state government’s department of planning website.
2. Where is the market at in its cycle?
It’s no secret that the best time to buy in an area is ahead of the growth cycle. Buying in at the peak means you’ve missed the boat. Suburbs, towns and cities will all go through cycles – it’s not difficult to evaluate if the market is a buyers market (what you want) or a sellers market. You just need to know where and how to access this information.
Where can I find this information? Source historical sales information (for a small fee) from the relevant state’s statutory authority on land information. For example, Landgate if the property is in WA, Land and Property Information if it’s in NSW, Land Victoria etc.
For historical listings data, you should be able to request this from your state’s Real Estate Institute. Run a comparison of the number of properties for sale and the number of properties sold over the last six months, 12 months, two years and five years. This will give you a comprehensive picture of the market’s cycles and what stage of the cycle the market is currently in. An increasing number of listings and a decreasing number of sales indicate the market is in a downcycle creating a buyers market.
3. What residential development is planned?
Any increasing demand for property in your identified area will be greatly softened if you haven’t accounted for increasing supply. Find out what residential development is underway or planned for the area.
Where can I find this information? Information on land releases, development areas, planning applications and building applications can be found on the local council’s website.
4. What type of housing will be most in demand?
To determine the type of rental accommodation that will be most in demand you need to know what type of people make up the local renting market.
Where can I find this information? Council websites and the Australian Bureau of Statistics (though be aware this information can be out of date) can usually provide you with information pertaining to the area’s demographics, type of housing and the proportion of the population that is renting. But to ascertain the demographics of the renting population, you’ll need to speak to several local agents. They will be able to provide you with a profile of typical renters in the area which will enable you to identify the type of housing most likely to be in demand, whether it be houses, units or apartments and whether there is a preference for new or older style accommodation.
5. What is the worst case market scenario?
Understanding and planning for the worst is an essential step for stress-free investing. A solid back-up plan that you can easily initiate if the going gets tough will give you complete peace of mind. The worse case scenario with any property investment is negative growth and a vacant property.
How do I plan for it? Property in general is a fairly low risk and stable investment. Having done thorough due diligence to this point, you should be in a position to make a well-informed decision. But successful and experienced investors know that you still need a plan B. You need to know your financial limits.
For example, if you plan to negatively gear a property, at point would you no longer be able to afford the interest payments if rates were to rise or the rent dropped? Reducing the risk of not being able to afford your monthly payments is one reason why positively geared property has risen in popularity in recent years. But regardless of gearing, how long would you be able to maintain the interest payments with no rental income if the property was vacant? A rule of thumb is to give yourself a buffer in case of emergency by having the equivalent of four weeks rent in a savings account.
Taking the time to work through these key points will arm you with the knowledge and understanding required to make an informed decision on where and when to buy. Investors who do their due diligence stand a much better chance or getting their investment purchases right the first time and creating a successful portfolio sooner.
NEXT WEEK – Due diligence made easy – your step by step guide: Part 2 – The Property