The Experts

Margaret Lomas
Expert
+ About Margaret Lomas
Founder and Director of Destiny Financial Solutions
Past chair of Property Investment Professionals of Australia (PIPA)
Author and Television Host

Property management for 'niche' market property

Tuesday, July 10, 2018

If you are a property investor, chances are that you intend to buy more than one property.  You most likely want to build an entire portfolio of them. If this is the case, there’s a chance that, at some time in your property investing period, you might consider acquiring what I call a ‘niche market property’.

As I have explained in a previous article, a niche market property is one which is designed to cater to a specialty market.  Included in niche market properties are Holiday Houses and Apartments, Serviced Apartments, Student Accommodation and the fast growing area of Seniors Accommodation. 

Buying any of these kinds of property not only requires extra research and attention to detail, but it means that they are more than likely going to be managed differently.  Having a sound understanding of the different kinds of potential management arrangement is critical – as with any property, poor management can impact on not only the return, but the ultimate value of your investment.

Here are a couple of the more common forms of niche market property management arrangements.

Management agreements

The first one is known as a management agreement. This most likely involves an on-site manager already in place, who may have been retained under a range of different arrangements. A management agreement refers to a written contract between the owner(s) of property (often as a body corporate) and an experienced operator. It will consist of a list of requirements of this manager, along with a schedule of remuneration for his or her services, typically expressed as a percentage of gross or net revenue.

Where a manager has been retained via a management agreement, and there is no associated granting of real estate or retail rights, it’s usually fairly simple to terminate his or her services if the grounds are just. Make sure you’re familiar with the exit clause and that there is not a large cost to terminate a poorly performing manager.

Management rights

Management rights are similar to management agreements, however they’re usually ‘purchased’ by the manager and involve the acquisition of some of the real estate. Typically, management rights will be sold by the developer prior to completion of the project for several million dollars, and may include an apartment in the complex plus rights over any restaurant, bar and reception area.

Terminating a poorly performing manager who has purchased these rights can be fraught with problems, and very often these types of management rights are bought by couples with little or no hotel management experience. This could have dire consequences for the success of your property investment, and you should ensure that you have an appropriate risk profile, plus money to lose, before buying a property under an arrangement such as this one.

Leasebacks

Finally, Leasebacks differ from other management agreements in that they involve a manager actually signing a lease with each individual property owner, in order to then on- rent the property.  Some investors feel more comfortable with this type of arrangement because it means that rent is going to be received even when there is no one occupying the property. That lease can be negotiated to include a clause requiring the lessee to pay all outgoings, such as rates and electricity, from the gross rent they receive.  This way, the property owner knows exactly how much they are likely to receive each month.

This can be false security, though, as the ability of the manager to pay the lease is linked directly to his or her success in running a profitable venture. Where the venture returns less than needed to honour the lease agreement and all it’s included clauses, the manager has to provide top up funds from other sources (such as the restaurant and bar that are a part of the complex your property is in, or even another establishment) or, if there is no other source, the lease will not be honoured.

Niche market properties tend to have an added layer of risk which ultimately impacts on the overall value of the property and the short- term performance.  I always recommend that, where an investor believes that any niche market property may be a suitable addition to their portfolio, they seek sound and independent financial and legal advice, and ensure that their entire investment strategy, including non- property investments, is taken into account. 

Many niche market properties have an exceptionally poor track record, which is rarely discussed by the property spruiker selling the property, and when it comes to this type of property, the term ‘Caveat Emptor’ (let the buyer beware) is never more appropriate.

 

Why cross collateriliastion can work

Tuesday, June 05, 2018

I‘m constantly hearing the negative views of property experts in regard to cross collateralisation and find that I am forever at odds with this view. You may have heard all sorts of opinions about whether it is a good thing or not, with some ‘experts’ claiming that it should never be done.  I certainly do not agree with this, and believe that the drawbacks touted by these experts are ones that cannot be avoided, even if you separately collateralise every property you own. 

You see, when you borrow money you must pay it back. The bank holds collateral security in the form of your property to ensure that, if you don’t repay your debts, it has a way to recoup what you owe it.

In the unlikely event that what you owe the bank exceeds what it can make by selling the security it holds, the ‘all monies’ clause in most loan contracts means that the bank will require you to find the money somewhere else. This can, and will, include you selling anything else you have in order to repay the bank in full, even if your additional assets are presently securitising loans with another lender, or a spate loan with that same lender. This means that there is no protection in having your properties held by many different banks, as your lender’s power to recover monies due from you extends beyond the security it holds. 

There are other disadvantages with having loans all over the place and separately collateralised, most notably the added complexity of accessing increased property equity for further leveraging.

If all of your properties are cross collateralised, and each of those properties grows by a small amount, all of those small amounts, when added together, can easily add up to be enough to form a deposit on another property. 

Where each property you own is held by a different bank, or as part of a separately collateralised structure, then a single property must increase enough in value to generate a deposit to buy more property without having to re-mortgage the whole package or take some other complicated action. 

Of course the major drawback is that, if you wish to borrow more money and the bank decides to revalue everything, then any properties which have lost value could create a situation where you won’t be allowed to do this.

I have also found that, in recent times, I have been able to ask my bank to only re- value those properties which I know have gone up in value, and this guards against an across the portfolio revaluation resulting in negative growth, where properties I have bought may not have done as well as I would have liked (yes!  It happens, even to me!). You can go some way toward guarding against this by learning how to research well and investing in those areas with solid growth drivers. 

In my opinion, choosing not to cross-collateralise will not provide protection against having to sell more than what the bank holds in the event of difficulties. It will, however, make it harder for you to easily capitalise on the increasing values and will be more costly every time you need to adjust or increase your loan.

 

The importance of hot spotting

Wednesday, May 09, 2018

 

Many investors are guilty of following the media, or known property commentators, when it comes to choosing where to buy next.  It’s come to be known as ‘hot spotting’ and, these days, investors are so busy running their own lives that they feel it’s suitable to simply take the advice of some expert who has done the research, and buy in the areas they recommend.

I can’t count the number of times that I have either had experts on my show, or read tips in magazines, all touting the next best area in which to buy, only to find that I personally bought in that very same area many years before.

Don’t get me wrong – at least if you follow the experts and buy where they say, you are getting something into your portfolio, and taking their advice most often means it should perform OK for you. But think about how much better it all would have turned out if you had bought long before anyone had picked the area as being a potential hotspot.  Just how much better could it be?

Take my property purchase in the Logan Shire as an example.  In the past three years, everyone has been rushing to Logan, most of the ‘experts’ have had it on their lists and it’s likely that the investor interest alone has pushed up prices.  You can buy a townhouse there for around $200,000 and get pretty good rent at about $265 or so a week, a nice 7% return.  It seems like a great buy, and it’s most likely going to see some fairly solid growth, since the area abounds in growth drivers and is becoming less stigmatised as the years progress.

Imagine, though, if you had bought when I did, about 9 years ago.  These same townhouses were around $95,000, and the rent at the time was $160 per week, or a cool 8.75% return on investment.  The value doubled in around 6 years, and the present rate of return on that investment of $95,000 is 14.5%.

My two townhouses have easily looked after themselves in terms of their cash flow, and already doubled once in price.   I don’t expect them to double again, however they will grow some more and, overall, it’s a pretty successful investment.

Following the experts is one thing, but true hot spotting is about finding the area first, way before anyone else does, and then sitting tight and waiting for the crowd to follow. And while it’s not an exact science, there are definitely characteristics about an area which should mean you can at least buy something which will hold its value, and very likely grow well into the future as well.

By now, most would know what growth drivers are, and how to recognise if an area has them. There are a few fundamental drivers which all must be in an area to make it a potential future hotspot.  They include:

  • A population growing faster than the national average which includes
  • A high concentration of families, with children of primary school age, who are
  • Within commutable distance of varied major employers of both blue and white collar workers and are
  • Supported by the services which families demand – i.e. local schools, day-care centres, shopping centres and public transport who can buy
  • Affordable housing within growing communities

 

 

 

 

What you’ll notice about that list is that the fundamentals are interdependent – and, in my opinion, a true future hotspot must have all of them.  Outside of those five fundamentals, the other growth drivers which I discuss in my 20 Must Ask Questions book are the characteristics which help determine how soon the growth can be expected – the more of them which exist, the more likely the area is to already be a hotspot.

True hot spotting requires a small leap of faith, and a fair amount of patience, as you wait what could be a number of years before too much happens.   But if those fundamentals exist, the risk diminishes, as it’s highly unlikely that an area with those characteristics will fail dismally, and in the meantime they often fetch a good return for the buy in price.

Such an area usually has a fairly solid foundation upon which a community can build – and communities are generally stable, inclusive and grow fast as people want to move into them and build their new lives. They are usually less desirable, initially at least, often in the outskirts of major cities, and considered to be remote by CBD standards. 

But as the country’s population continues to rapidly expand, these same areas will enjoy improved demand and house price growth pressure. And if you can get into some of them before it’s talked about in a magazine or on TV, you can sit back and enjoy yourself while the experts talk the area up on your behalf. 

 

 

The high yield property trap and what to avoid

Thursday, April 26, 2018

 

While I'm as interested in a positive cash flow for property as the next person, I'm also critically aware of how investors who simply search for high yielding property often create a situation where they never create any real worth from their property investing!

Often a property with a high rental yield for its purchase price is one which has that yield for a reason – and usually it's because it's situated in an area with a single industry, yet little in the way of available rentals.  These areas may experience periods of rapid value growth, but can just as quickly plunge in value, too quickly for the investor to exit the market, leaving them with a poorly performing asset.

While it's critical for investors to at least have enough in the way of yield to assist in the holding of a property, without growth to the value, there is little point to holding such a property. At the end of the hold period, the investor may be able to show a positive cash flow of $20 or $30 a week, but their own net worth will not have improved from the exercise.

And so, if we understand that a very low yielding property is also just as inappropriate, since such a situation can result in both early divesting of the asset (when the costs of holding become too high) and the limiting of adding to the portfolio (when the investor cannot afford to ‘prop up’ additional properties), then it’s clear that the skill in property investing lies in the ability to pick assets which have the potential for future growth, while they have a suitable yield now.  In addition to this, understanding how claiming on-paper deductions, such as capital works allowances on the building, can substantially improve your net cash flow position is knowledge that all investors should have.  This then allows them to make better choices when two properties in the same area are presented – picking the one with the better on-paper deductions can improve the cash flow on that asset, in turn providing more funds to meet expenses and pay down debt.

To achieve this, the investor has to understand a few important points:

  • Present hotspots, or areas being written about, are likely to have already achieved their best period of growth.  Areas usually only make hotspot lists when they are already hot.
  • The adage that the closer to the city you can get, the better the growth, is not correct.  Many suburban and regional areas have performed exceptionally well, often beating the performance of inner city properties, when they are purchased just prior to a major growth spurt.
  • Key growth drivers include a fast growing population, abundant infrastructure planning, diversified employment opportunities and a median household income which is growing faster than inflation, often off a lower base.
  • Blue chip areas may have been good investments in the past, but once they are blue chip then you have most likely missed their best years of growth.  By that I mean that they will maintain their values and still grow, but are unlikely to experience the kind of ‘boom’ growth we would all like to see in our portfolios.

The other driving force behind growth in an area is the dominance of the family demographic in an area.  Families tend to anchor to an area and, rather than move away, move up.  Once children are in school people tend to stay, making the availability of property in the area scarcer.  Where such an area also has the fundamentals above, and is becoming a more desirable prospect, pressure will build as demand takes over supply, pushing up prices, even when those prices in other areas are stable.  This usually happens in areas with highly affordable property, where the yields are higher than they are in inner city areas but where the commute distance to employment is manageable.

 

 

The difference between men and women in property

Thursday, March 08, 2018

With International Women’s day now upon us, it’s a good time to talk about the differences in how men and women invest in property.

It’s found that, not only do more women choose to go it alone as property investors than ever before, women, when investing with a spouse or partner,  tend to be predominant in making many of the decisions about property investing.  This includes decisions about when and what to buy, where to buy it, how to finance it and how much to pay for it.

Is this a good thing?  Well, yes and no, but one thing is certain -  knowing more about the characteristics which separate men from women as investors can go a long way toward ensuring that women investors become aware of where they may fall down, and address it.

When you buy your first, or next investment property, one of the most critical keys to investing success is the quality of the research you do before you even choose where to buy.  Too many investors, men and women alike, will invest according to the numbers (how much will it cost, or give me, after tax?), ignoring the fact that even a property with good numbers can be a dismal failure if it exists in the wrong area, and never grows in value.  And yet, when it comes to that research, men tend to buy what’s ‘hot’ without much more than some cursory research, while women can be in danger of missing what’s hot, as they become caught up in analysis paralysis. It can be enough for a male to hear or read about an area as being the next best thing, and they will be in, without too much validation. 

While they are onto their second and third property, many women are still plodding through the research, asking a million questions and validating the results to make sure they don’t make a mistake.  It’s been my experience, from examining my own client base, that males tend to find that, once they have a larger portfolio, this tendency to rush in results in a number of properties in the portfolio existing in areas that aren’t going so well.  Females, conversely, may build smaller portfolios as they spend too much time researching each buy, but the properties they do buy have a greater chance of existing in better areas for growth.

When it comes to choosing an actual property to buy after all the research has been done, men buy what they like the sound of (usually a bargain), while women buy what they like the look of (‘I would live there myself’).  Both of these methods have obvious advantages, but disadvantages too.  Properties that make great investments aren’t necessarily ones you would live in, since they often exist in areas that are hotspots in the making.  Many can be family, former state housing or lower socio- economic areas that are slowly changing and becoming more popular, and buying there can mean you can ride the wave as it trends up.  Properties that you get for a bargain price can often have some impediment which justifies that bargain price, and that impediment may interfere with future demand, and so the growth in value.  

There are other differences between men and women and how they invest. Men are ‘competitive and measured’, while women can be ‘reluctant and unprepared’. This can result in males adding to their portfolio more frequently, but with poor choices, just so that the number of properties they hold is large and looks good on paper, while women can sometimes feel a little overwhelmed at the prospect of building that large a portfolio on their own.

Men have a higher opinion of their ability to invest, but more chance of bad choice as a result of this confidence. Men enjoy the process of buying property, as it provides the excitement of choosing, negotiating and winning, while women enjoy the satisfaction which comes from the end result – adding a property that they know they have spent a long time choosing, even if they didn’t enjoy the process along the way quite as much.

And finally, men like to do it alone, while women are often much happier when they can do it with others.  This is a reflection of the differences between men and women in many areas, including being in business.  It’s often found that in business, men guard their professional secrets as they compete against others in the same field, while women tend to share their ideas more generously, and rarely feel threatened by the competition posed by their peers.  Equally, women like to have someone to buy with and if it cannot be a spouse or partner, will happily seek out friends or other relatives to share an investment property.  This difference can carry a real danger, as buying horizons, financial goals and investment preferences can often be very different between parties, setting up a situation for potential future discord and, worse, a complete falling out.

There’s no evidence that one sex has better overall outcomes than another, but it is useful to be aware of these differences, so that next time you’re ready to buy a property as an investment, you can address what might otherwise be a drawback to your success.

 

Is old or new property a better investment?

Monday, February 12, 2018

It’s probably one of the original property investing debates – should you buy an established property or a new one?  And, as in most debates, there is no single answer.  In fact, the answer is – it depends.

Ask any property developer and they’ll tell you – buy only new.  A new property comes with significant depreciation benefits, meaning that you are more likely to see a positive cash flow – a situation where the shortfall between income and expenses on a property is removed by tax benefits which exceed that shortfall. 

Of course, we should ignore the fact that of course a developer thinks new is best, and also that, depending upon whom you buy from, very often developer profit hikes your buy – in price above that which you would pay for a similar property which is a few years old.

The point is, you need to consider the entire argument before you decide what to buy.

New properties do carry depreciation benefits, on the building and on the fixtures and fittings. After the first five or so years you are down to just the depreciation on the building, and whether the property is brand new, or a few years old, you can still claim building depreciation.  If you consider that a brand-new property might set you back several thousand, and is often tens of thousands of dollars more than the same sized and shaped property, which is a few years old, then this added taxation benefit might be moot after all. 

I’ve found that often a property which is two to three years old can be better value than the new one.  It’s like that brand-new car which loses 15% of its value as you are driving it out of the show room – with a new property the premium you pay for having everything shiny and new is quickly absorbed and value is lost almost immediately. 

Properties that are a few years old have also been run in a little, with any major issues most likely identified and fixed already.  These points have little meaning for the owner occupier, who most likely plans to stay for years and whose asset is capital gains tax free. But for the investor who needs every dollar of equity to enable future leveraging, that premium can be costly in the bigger picture. 

Remember, too, that the ‘value’ of a property is determined by the recent sales in the area.  A new property is harder to value as there is little to compare it to.  I’ve lost count of the number of times that I have seen investors buy property in massive new developments, only to find that a year later the property is worth $40,000 less.

This loss is likely due to a combination of factors – the developer profit (and middleman commission) made it more expensive in the first place, the size of the development created a supply issue for which there was not enough demand, and the market was now undergoing its first real test – resales were happening and the true value was finally being realised.  Of course, where that new property is not part of an overall estate, then it’s easy to tell if it’s at market value, as it will be compared to the older properties around it.

Demand is a big consideration, both from purchasers and renters.  An older home situated within a swathe of brand new properties would make an unwise choice, and is likely to have less demand from the available renters (and future buyers) than a property which is more the norm for the area, unless it is at bargain price.  But where the area has a greater proportion of established properties and a demonstrated demand for them from renters, then that ‘new’ property may not add any bottom line benefits to the investor, and may only cost more. 

 If the new property is the same price as the older property, then the newer one is the intelligent choice, as maintenance costs should be less.  I don’t think I’ve ever seen a new property available at the same price as an established one, so the extra that you will pay has to be considered alongside the savings you might make on maintenance.

Investors really should not be starting their search for property with a decision to go out and find only a new property, as this suggests that all they are considering is cash flow.  I’ve seen many beautiful new properties full of tax benefits being sold by middlemen on big commissions to investors who simply want to see a positive cash flow, and those investors didn’t bother to analyse the real viability of that underlying asset in investment terms.  The result is a positive cash flow property which fails to thrive and a disappointed investor who realises that you cannot retire on cash flow alone!    

Rather than take part in the ‘new or old’ debate, all investors should first determine where the best area is in which to buy.  Then they should find out what type of property is most in demand there.  It’s likely that an established property, as long as it’s not too old and therefore a maintenance trap, fits the bill quite nicely and doesn’t carry the premium that a brand new property does.  It’s also likely that, as long as it’s only a few years old, the tax benefits will good anyway, the rent return the same, and the lower price will mean that great cash flows still exist and there’s profit to be made. 

 

Is the bubble about to burst?

Thursday, January 18, 2018

We’ve seen it already – headlines claiming that the bubble is about to burst and property is going to crash.

Yawn.  I mean, I have had a pretty relaxed break over Christmas, but I was starting to feel quite energetic about starting work again until I saw these headlines, and it instantly began to feel like ground hog day!

Let’s just ignore the postulating, the calculating, the figures and the analysing for a moment, and look at real life, and what is actually happening.

Firstly, there isn’t a single property market.  There are around 4,350 postcodes in Australia today, with some of those postcodes covering up to 20 suburbs or localities, and pretty much every one of those suburbs has a different median price. The closest estimate that I could find is that there are a total of 15,274 cities, towns, villages and suburbs in Australia.  Along with that, every single one of them is exposed to different growth drivers, and also has the capacity to grow at a different rate, and at a different time, than even their neighbouring suburb. 

Sydney has roughly 650 suburbs at last count, meaning that, as a percentage, it comprises around 4.2% of the total number of suburbs.  Melbourne has 321 suburbs, or around 2%. Now, I will grant that some of these almost 1,000 suburbs will be far more dense and populous than some of the other suburbs counted in the 15,274, but the point I am trying to make here is that even if the Sydney or Melbourne property market crashed, that means that only 6.2% of the market will be crashing.

Secondly, let’s look at what’s actually been happening in these 15,274 suburbs. 

Everyone knows that Sydney has boomed along these past five years. That was a much- needed boost, given that between 2003 and 2010, when most other capital cities experienced an almost doubling of values, Sydney only grew a total of 17%.  Over the past 5 years, Sydney has grown at around 75%, or 18.4% per annum – each one year has been better than the entire 7 years between ’03 and ’10!  During that time however, Adelaide has only grown by 4.9% per annum, Perth by 3.7% and Brisbane by 4.28%. 

It’s hard to see any property boom there, and given that the demand in all three areas is currently higher than the same time last year, equally hard to spot an impending crash in any of those capital cities.  While it’s certainly true that Sydney property will begin to slow during 2018, it’s my opinion that all three of these markets are likely to continue to see a creeping demand which actually increases prices, rather than makes them fall.

But, back to my first point: there isn’t a single property market – there are over 15,000 of them!  Even looking at how these capital cities, as a whole, are performing doesn’t provide a true picture of what we will see happening in prices this year, and this is the major problem with how property price movements are reported. Averages always take into account the highs and lows, to report a figure somewhere in the middle, and if this is how you decide where to buy property, you’ll miss the areas which are on the precipice of excellent growth - and mark my words, this will happen this year in a number of markets.

I don’t expect a crash in Sydney, although I do expect that anyone who tried to rush in during the final stages of the boom may well have paid too much and is likely to see not only a correction of the price they paid, but a significant lull in growth for some years, making it seem like their values have crashed. To a lesser degree, Melbourne buyers in some areas might see a slow- down, but little to report in the way of values losses, with the exception of the over- supplied inner- city apartment market. Outer suburbs of Melbourne will most likely grow – with significant demand pressure on transport linked nodes in the Western suburbs.

As for all other capital cities, with the exception of Darwin, I think we will see growth, and some robust growth at that in many undersupplied suburbs which sit alongside logistics centres and where transport and community facilities are being upgraded.  In fact, in some affordable suburbs, I’d say we will see double digit growth, as demand outstrips supply and rentals begin to turn into first home owner occupied properties.   

But of course, none of this is exciting news, and the headlines will still find some way to scream ‘property bust’ as the Sydney market cools and becomes more normal. I’m happy with that though – some of my best buying always occurs when there’s a ‘crash’!  As Warren Buffet says, ‘Be Fearful When Others Are Greedy and Greedy When Others Are Fearful’.    I’m getting ready to be greedy this year!

 

 

The next property markets to boom

Tuesday, November 21, 2017

By Margaret Lomas

You don’t even need to be a newspaper subscriber to know that the headlines are screaming that the property boom is over, and that we (again) are looking down the barrel of a property collapse. Open Twitter, look at your Facebook page, browse Google or turn on the TV, and it’s all the talk.

I’m constantly incensed at how myopic the press can become when they’re talking about property, and, unfortunately for the rest of the country, the performance of the Sydney market dominates discussion and is presented as the be- all and end- all of property. This shortsighted-ness extends to include a short memory, as everyone has already forgotten the complaints made by any NSW property owner back in the early noughties. Between the years of 2003 and 2010, when all other capital cities almost doubled their property values, Sydney returned an abysmal 17%, and those who had purchased, and held for those seven years, felt that NSW was the worst place in the country in which to buy property.

And so here we now sit, with reports of the great property boom being emblazoned across every available public space, and the poor people of Brisbane, Adelaide, Perth and Darwin are glancing about with stunned expressions, thinking it all must be some kind of joke as they look for the property boom which never was – in their part of the world at least.

The property cycle in motion

The point is, for as long as property has existed, so has the property cycle, and Sydney (and only Sydney) has just been through the upswing of its cycle, after spending a protracted period of dismal years lolling about in the growth cemetery. If you had bought in 2012 and were ready to sell now – it’s been a great ride and you’ve likely made around 45% in five years. If you had bought in 2003 and were ready to sell now – you’ve made about 74%, but it’s taken 14 years, so it averages only around 5% per year. But had you bought in 2003 and sold just before prices started to move in 2012, you’d have made an average of just 1.88% a year, well below what you could have made in any other state. And during that time, when the headlines were screaming ‘Property Slump!’, the people of Perth were quietly enjoying a 100% increase to their net worth, as property doubled, and in some suburbs almost tripled, in a four-year period.

Yes, the property boom is over – in Sydney! I can’t see how this is a surprise to anyone – without wages growth, sooner or later growth in any market will become unsustainable, and a slow-down will occur. However, the property boom is far from over country-wide, and forever more, there will always be a market somewhere which is at the bottom and turning around. The figures above prove what savvy property investors know to be true – market timing is absolutely critical – and even more so than ‘time in market’, although staying in for a suitable time also helps.

So, where to now?

So many choices, and so many markets being presently driven by far more than investor sentiment.

Perth is most definitely nearing the bottom. In classic media driven misconception, Perth is a market which can hold its own without the need for a mining boom. Long before mining was even such a big thing in Perth, this affordable market chugged along nicely and managed its own wonderful mini boom just before the mining boom skewed the figures and drove industry-related demand into the market. Now that it’s all settled down and things are returning to normal, the sizable population and reducing rental vacancy and unemployment rates should result in a return to normal activity, which will include house price pressure. Look for the up and coming trendy markets just east of Perth CBD, on the road to the airport for well- priced property with early evidence of improving demand.

Up in sunny Brisbane, Moreton Bay Regional Council is creating a thriving new major precinct that will generate thousands of local higher education and employment opportunities for the region.

Sitting just 25 minutes or so north of the CBD by car or rail, this full-scale University of the Sunshine Coast (USC) campus will boost demand in the growing Northern Suburbs. On track for completion in 2020, it’s supported by additional work, study and community facilities, and will cater for up to 10,000 university students in its first 10 years.

There’s also a great link to the area by the onsite train station which will connect local residents from right along the Redcliffe Peninsula Rail Line, and the Caboolture Line, to the new Petrie campus. This kind of infrastructure, when you add it to the already climbing demand for affordable property within commutable distance of the city, is bound to push ahead prices and result in great rental yield too.

And for those who are really into steady yet compounding growth, let’s not forget Adelaide, where the present median price of $588,000 represents an impressive 138% growth over 14 years! It kind of creeps up, because it never really booms in the way we would recognise it, but

it does grow steadily, every year! The expanding Southern Suburbs down to Aldinga Beach, with the new freeway duplication and an explosion of families, is bound to keep delivering as the council supports this expansion through significant infrastructure development and service provision.

The boom isn’t over. The crash is not imminent. The big opportunity in Sydney has, for now, passed, although it will come back. But, somewhere in Australia, there’s a boom just waiting to happen, and if you stop looking for the instant gain and start thinking about what really drives growth, you can get in on the ground floor of that next boom and ride it all the way home!

 

Picking the bottom

Tuesday, October 10, 2017

By Margaret Lomas
 
It’s probably the most asked question of all time for property investors, and the hardest one to answer with any certainty – how do you tell the bottom of a market?

You’ve likely heard property spruikers telling you that it’s ‘not market timing’, it’s ‘time in market’ that makes property investing a success. As far as I am concerned, this is classic spruiker speak, designed to ensure that, once you have taken the bait and purchased from their stock on offer (and started to think that maybe you’ve been stitched up) you wait around for that magical ‘time in market’ to do its job rather than complain to them about the lemon they sold you. Eventually, most properties will grow and if it’s been long enough, you are less likely to do the calculations to discover that money in the bank would have been a better option for you than that property!

Another gem is that property ‘doubles every 10 years’. At a recent property expo, I actually heard one presenter claim it doubles every 7 years!  He based the success of his own ‘formula’ on this assured doubling. It was easy enough for the audience to swallow that one, given that they all most likely lived in property in Sydney that had just gained about 70% in three years. It was such an exciting time for Sydney property owners that most of the ones who have owned property longer than that have simply forgotten that for the years between 2003 and 2010 they were lucky if they saw a 17% total improvement in the value. A doubling of value in 7 years is going to be a real stretch even for those who got in just before this recent boom, and I can’t imagine how people in Perth and Darwin would be feeling about that claim, given the sad performance of those two markets.

I’ve always said that, as long as you understand what drives property growth and choose property which possesses all of those characteristics, and then hold it for at least 10 years, you should, at some point in that 10 years, have a period of time where you do see a good spurt of growth - certainly enough to have made the buy worthwhile. I’ve also said that one of the most critical skills you need as a property investor is the ability to time your market well – good market timing every time you buy will absolutely improve the overall outcome of your portfolio.

And so, it is understandable that everyone wants to know how to work out just when the market is at the bottom, so that they can get in to ride it to the top just before the tide turns!

It’s important to note though, that not every falling market will turn into a rising one, and not every market at the bottom will change direction and start to head to the top. If this is what you believe, then you could well find yourself with properties which sit in the doldrums for years, never showing any real growth during your investment period. It’s highly possible for a property market to be low, and stay low for a very long time, just as it’s also possible for some markets to go up a little, then down again, then up a little, and down again, endlessly!

However, while it is actually not possible to pick when the bell is ringing to signify the turn of a market into an upward trend, there are definitely indicators that a market is trending up rather than down, and vice versa. Knowing what they are might help you pick better properties, avoid bad properties and divest properties which are about to head south, sooner. Here are some tell-tale signs that you can look for before you start to see an increase or decrease in actual prices:

  • A shrinking of the number of days on the market (or an increase for a falling market)
  • A reduction of the percentage that prices are being discounted by to effect a sale (or a rise for a falling market)
  • An increase in the rental yields when values aren’t really moving yet (or a fall in a declining market)
  • A decrease to the vacancy rate (or increase in a falling market)
  • A short- term boost to population numbers which cannot be explained by other factors (such as large infrastructure builds bringing in new labour)
  • A reduction in housing starts in the area (or an increasing number of new builds in a falling or stagnant market)
  • A lack of new land supply (or an abundance of new land releases in a declining or stable market).

While the above factors are not a guarantee of a market swing either way, being able to establish them will go a long way toward improving your property investing success. Identifying these factors requires you to carefully monitor the market and map the trends you see happening from month to month. This is why investing in ‘hotspots’ carries so much danger – someone else has monitored the market and the upswing is already well under way by the time you hear about it!

Patience is the key, and knowing that there will always be a rising market somewhere should give you the confidence to wait and not jump in for fear of missing out. Conversely, don’t use the need to monitor trends as an excuse not to buy if you’re a procrastinator – take too long to establish whether the market is rising and you’re likely to catch it while it’s turning – the wrong way!

 

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