Investing in property seems to be a national past time and everyone has an opinion about it. So I thought I would look at why the government recommends property and what they view as the opportunities and risks - something we can help with as we strive to maximise your opportunities and minimise your risks.
This article closely references the Australian government website www.moneysmart.gov.au
It’s a great resource for any Australian wanting to understand how money ‘works’ as a commodity in the market place and the different asset classes Australians have access to.
The first point is that property seems a pretty straight forward asset to understand. We have a pretty good idea about the costs involved to buy and to hold. Who hasn’t looked into Real Estate Agent windows when they’re on holiday to see how property compares with property at home? Or pored over the real estate pages in the weekend newspaper.
The website highlights the pros and cons of investing in real estate. I always look at investment as an equation equal to opportunity over risk. If you can understand and maximise the opportunities and minimise the risk, there is a good chance you’ll do very well out of property investment.
So here goes - the Pros and Cons.
The Pros of property as an asset class available to you to invest in
Less Volatility - In any given 7-10 period in the majory property centres in Australia - think Capital Cities and major Regional Centres, property will return a steady 6.8% per annum in compound interest. It is a steady, predictable investment in the medium to long term.
Income - Assuming the property is in an area where there is rental demand, you should earn an income from the rent.
Capital growth - If your property increases in value, you will benefit from the gain when it comes time to sell.
Tax deductions - We have a tax system that allows us to offset most of the expenses associated with property investment against the rental income received. This includes, interest paid, property management fees, insurance, strata costs and maintenance costs.
Physical asset - It’s a tangible asset you can see and touch. It’s real, not an idea.
Specialist knowledge isn’t required. Unlike some more complex investments you don’t need any specialist knowledge to find or buy property.
Like any investment, there are risks and moneysmart highlights the following:
Cost - The rental income may not be sufficient to cover your mortgage payments and other expenses of holding the property.
Interest rates - Any rise in interest rates means less money in your pocket. Interest rates are historically low so it’s a great time to invest in property, but it’s also important to stress test all of the numbers used in your cashflow.
Vacancy - It’s likely that at some point your property won’t be tenanted so this is another variable you’ll need to stress test. I always recommend having extra money, usually in an offset account, to offset any unforeseen expenses. The riskiest time for vacancy is at the beginning of the home’s life, especially if it’s a new home you’re investing in. It’s important to have a strategy to overcome this as the house is being built.
Inflexible - If you need some quick cash, you can’t just ‘withdraw’ it from the house, like you can a bank account, or to a lesser extent, shares. You can refinance and most lenders will allow you to do a small ‘top up’ on your existing mortgage, assuming you’ve built up equity.
Loss of value - If you don’t get the timing of the market right, there is a risk that the value of the property will decrease in the first cycle. Many investors invest in the wrong markets at the wrong time and buy just before the peak of the market. FOMO is not a good investment strategy! Understanding the cashflow on each property is even more important. If the holding costs on the property are too much and adversely affect your lifestyle, it’s unlikely you will be able to continue holding onto the property. This means that you can’t sit tight until the market turns and that is the biggest risk of property investment.
High entry and exit costs
Compared to some other asset classes, the up-front costs of property acquisition can be steep. The deposit required, based on LVR policy at the time, the stamp duty and legal costs can be high. Similarly there are costs incurred when you sell the property. Break costs on the loan and real estate agent fees.
The government recommends a diversification strategy, spreading your risk. Property markets don’t all move at the same time or at the same rate, so it’s important to diversify across different markets.
Once you’ve weighed up all the pros and cons, if you decide that investing in property is the right asset class for you, then you need to consider what to buy and where to buy. There are many different property strategies available to the Australian investor. Some people look at how they can build equity through minor renovations or building a granny flat, others like to speculate on areas and try to pick the market so they can buy low and sell high, but the vast majority of investors buy a property to ‘set and forget’. If that’s you, then it’s best to find a good quality property in a high growth area with low vacancy rates.
Research, Research, Research!
The first thing you need to do is RESEARCH. What you buy and where will affect your return on investment.
Most investors won’t have the time or experience to adequately research property markets as there is so much data needed to be analysed in order to make an informed decision, however there are some key areas that will help.
The macro research will help determine the timing of the market. Key areas such as the strength and diversity of the economy, unemployment and infrastructure projects will indicate whether a market is set for strong capital growth.
The micro research will point to the likelihood of finding good tenants, long term. To ensure you’ll be able to hold onto your property long enough to realise the growth, you’ll need good yields and low vacancy rates.
Once you’re confident with the city or regional area, you’ll need to decide on the best suburb. Look for demand, lots of owner occupiers and proximity to amenities that the demographic will find attractive. This will help to determine the kind of property too. If you know who your tenant is going to be, you’ll better understand the property they’ll like.
Families consisting of a professional couple with a couple of kids will be most attracted to large family home close to good schools, shopping centres, parks with playgrounds, aquatic centres, beach/waterfront and NBN service.
A young couple might like to live closer to the City and will be happy with a smaller low maintenance property like an apartment or town house near bars and restaurants, quick convenient shopping, work, public transport and strip shopping for retail. They’re likely to be younger and attracted to newer dwellings.
There is a lot to consider when it comes to investing in the Australian residential property market. The research is critical as is the property selection process.
Calla Property has developed an award-winning extensive research methodology that takes the guesswork out of property investment.
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