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

Negative gearing: the latest political whipping boy

Wednesday, September 05, 2018

Whenever there is any kind of economic strife within the country, or when governments begin to discuss budgets, negative gearing becomes the whipping boy on which almost everything is blamed.  There’s a lot of emotion around the discussion about negative gearing, with the opponents claiming it is a rort for the wealthy, while the proponents claim that it continues to prop up many otherwise lacklustre property markets.

Before you begin to invest in property, or take part in any debate about negative gearing, you must first know what the term means.  Too many people lack real knowledge about this area, yet form an opinion about it anyway. To understand this, let’s start with the second part of the term – gearing. 

What is gearing?

Gearing is the term used to describe the process of increasing the size of your investment through borrowing.  Typically, when you gear an investment, you use that investment as security to access more funds, which in turn buy more of the assets.  When you gear an investment, the results can be that you either receive a negative outcome - negative gearing, or a positive outcome - positive gearing.  It is important to note that both outcomes are based on borrowing and both outcomes are based on the amount of tax that you pay as an individual, and so the amount of tax break you can receive.

What is negative gearing?

Many people believe that negative gearing is a strategy that explains how people on high incomes get back more of their tax.  But it is not a strategy at all – it is a tax outcome. In fact, the definition of negative gearing is:

‘Gearing your investment so that the cost to maintain it (loan repayments, yearly investment costs and expenses) outweigh the income produced by the investment, leading to a reduction in taxable income.’

In other words, negative gearing happens where the total yearly costs of any investment outweigh the total income, and you’re allowed to claim a loss against income earned elsewhere.  But, you can never get more than 45% of the loss back, and you’ll always have to pay the other 55% yourself.  The pay-off for meeting this commitment is considered to be the hope that the asset you purchased increases in value over time by more than the amount of money you lost as a result of holding it!

What’s positive gearing?

If negative gearing is an outcome whereby the costs exceed the expenses, then positive gearing is the opposite, and results where the income on an asset you invest in exceeds the expenses.  For property, this would occur if you purchased a property that had a high yield for your purchase price.  With interest rates low and remaining that way, reducing the yearly costs of holding an investment property, and rents coming under pressure in many areas and so increasing, more incidences of positive gearing are being seen and some people, who initially negatively geared, are seeing these properties now returning a positive income.  

What’s positive cash flow?

While both positive and negative gearing are fairly straight forward, and are the result of a simple equation of taking expenses away from income and assessing the result, the real confusion comes with the third tax outcome - positive cash flow.  This is a tax outcome that always happens when you positively gear – the fact that the income is higher than the expenses will always mean that you end up with money left over, even if some is lost in tax. However, even a negatively geared property can have a positive cash flow, if the on-paper deductions provide enough additional tax back to close up the gap.  

What are on-paper deductions?

On-paper deductions are those deductions an investor can claim where money hasn’t been actually paid out as an expense – but part of the asset has lost value.  They are the deductions that result from the perceived yearly loss in value of the building, and in some cases, the plant and equipment inside that building.  In a nutshell, for each one dollar of reducing value of the claimable part of the asset, you can receive as a refund your marginal rate of tax.  So, for example, if the building declined in value by $5,000 each year, you receive up to $2,250 in tax back, with nowhere to spend this money, as it is an on-paper, rather than an actual expense.  If that same property had good rents that were close to covering the expenses, then this additional sum of tax back could close that gap and result in a positive cash flow.  

And so, you can see that, even when you ‘negatively gear’ you may not end up with a negative cash flow, and it is very important to understand that negative gearing or positive gearing is actually not the most important factor for you as a property investor – it is the final result, or bottom line cash flow (after all your tax claims are made) that governs your ability to hold an investment over the long term, even when growth is low. 

 

Which capital city is the best to invest in, right now?

Thursday, August 23, 2018

It’s no secret that buying an investment property in Sydney is now so 2016, and if you weren’t quite into it then, it’s too late to suddenly decide that you are now.  It’s not like you weren’t warned – not only did I issue warning after warning as the fire under the property market that was Sydney began to lose heat, so did virtually every other expert out there.  It wasn’t that the ‘boom’ had gone on too long, or that the ‘cycle’ told us the end was nigh – it was more about that fact that the median price had finally reached a point that was way above what the average income earner could afford.  There is only one single thing that makes a property market grow, and that’s demand.  When demand is taken away because price ultimately takes buyers out of any market, then it becomes a waiting game for wages to catch up again.

If you’re thinking that this means that you need to now wait to get an investment property under your belt, think again.  Savvy investors know that the theory that you should only buy property in a market where you live, or close to where you live, is a dangerous one.  The mistaken belief that you ‘know’ the market where you personally reside is one of the biggest traps for property investors.  This is because what you ‘know’ about where you live has nothing to do with whether the area is one that will give you the best investment return.  What you know about your area relates to lifestyle, not economics, and it is economics that will determine whether any area will grow well and deliver a suitable rental return.

And so, if not Sydney, then where?  Melbourne is close behind Sydney in terms of its point in the cycle, and it’s a fast closing window.  Hobart has been performing well, but its small population and low population growth usually means it has a stellar year or two and then nothing for many more years. Perth is likely at the bottom, but being at the bottom doesn’t mean that you’re headed up any time soon.  And even when an area at the bottom does head upwards, it can take years and the climb can be painfully slow, especially when there is an absence of strong economic drivers.

My money’s on Brisbane, and it’s all pure economics.

Firstly, the average house in Brisbane is still well below what the average income earner can afford. Even without wages growth, interest rates could go up, and property prices could increase, and the average wage earner could still afford to buy property there.  Since demand is the major driver of growth, there is no immediate impediment to demand, except, of course, oversupply.  This is an easy one to tackle – just don’t buy in an area with impending oversupply!

Secondly, changes to the age profile of the population in Brisbane over the next 10 years are expected to see those aged 20 to 34 move on to the next stage in life and look at buying a home of their own, according to Angie Zigomanis from BIS. He said the emerging trend would underpin demand for new housing on Brisbane’s suburban fringe and established housing in the inner-city region. These people will mostly qualify for the first home owner grant of $15,000 (and stamp duty concessions) which is available on many of the houses on the market, due to the high $750,000 cut off for the grant.  That wouldn’t even get you an apartment in Sydney, but it buys an awful lot in Brisbane.

Then of course we have infrastructure – tons of it.  New University campuses, major medical developments in both north and south suburbs, and main roads, tons of them, making the commute around all parts of Brisbane easier and easier.  There’s also the Queens Wharf Precinct, Brisbane Airport Redevelopment, Brisbane Live Entertainment Arena, Northshore Hamilton and a new International Cruise Terminal, to name a few.

It’s no surprise to see strong jobs growth in Brisbane in both the education and medical sectors, and also improving employment figures after a few years of poor results.  Things seem to be looking up in this area, but remember, in Brisbane wages growth isn’t as important for keeping a floor under what is already a highly affordable property market as it is in Sydney or Melbourne.

Strong inward migration will contribute, with the population expanding from not only overseas but interstate migration.  Why wouldn’t you want to live in a state which is beautiful one day, perfect the next? In addition, over the next 15 years, the population of Brisbane is set to double. In 2015, Brisbane’s population was approximately 2.2 million, and is expected to grow to 4.6 million by 2031. This means that the city will require 40% more homes than it had in 2006, according to government estimates, with a focus on building up, not out.

Finally, Brisbane is on track to become Australia’s next New World City by 2022.  Since 2000 it has consistently ranked within the top 30 per cent of the world’s fastest growing cities, and has been particularly noted for job creation.

It’s an investor’s dream , just waiting to be grabbed.  Just be careful what you buy.  Apartments in the city are not the best choice, nor are high-end properties where demand is subdued.  Think families, millennials and migrants, and find the kind of property that they are most likely to demand.

 

How much should a property investor borrow?

Thursday, August 09, 2018

I am often asked what Loan-to-Valuation Ratio (LVR) I recommend, and, unless I know the complete financial story of the person asking me, I can’t really say. There’s no ideal or recommended LVR for the general investor – rather each investor has a specific debt level which suits their own needs for income, growth and risk.

The term ‘gearing’ relates to the process of borrowing to apply a leveraging effect to your own funds to invest in a greater number, or wider range of assets.  The higher you gear an investment portfolio, the more you multiply the risk of loss, as well as the return.

Understanding how gearing impacts on risk and return is important for all investors, so that you can match your own needs and risk profile to suitable levels of gearing. An investor with a long time till retirement, a good income and sufficient excess funds has more appetite for risk, and so can probably afford to more highly gear, while an investor who may need the funds sooner and who has little chance of replacing lost funds, should adopt a lower gearing strategy.

Let’s take a look at a number of different gearing levels which an investor might choose and explore the type of investor that these levels might suit.

Borrow 80%

A borrower who is borrowing 80% or more of the total property they own is one who shows an appetite for risk. It means that you only have a small margin for value swings.  If your property falls in value by 20%, you will own nothing. You should not borrow to these levels if you are nearing retirement, have job instability or if you currently have no capacity to save or invest in additional assets besides the property you are borrowing for.

Borrow 60 – 80%

An investor with a medium time frame in which to invest, relative job security and an income which can facilitate additional debt repayment or additional investing, as well as a mid range attitude to risk, can choose an LVR within this range.  A fall in value of the security property is unlikely to result in total loss of personal wealth, and at these levels of gearing there is still a good amount of leveraging which enables the purchase of more assets, and so the exposure to higher levels of growth and wealth creation. 

Borrow less than 60%

An investor with a short time till retirement, a limited amount of years available to work and a small amount of savings is well advised to keep their gearing levels below 60%.  At this level, a good margin is built in to ensure that family home assets are not likely to be at risk and that, should property values fall, a nest egg in the form of remaining equity would still exist.  This nest egg could then be used to undertake an alternative investing strategy to compensate for any losses which may have been incurred through a poor choice of property investment or through market value decreases. 

My advice to all investors is to treat any advice or invitation to invest using high levels of gearing with the utmost care and consideration, and know your personal appetite for risk.

Wise investors usually maximise their gearing levels at 80%, and attack debt reduction with vigour and commitment to reduce this quickly.  Remember that for every $1 of property you own, that’s $5 more you can buy with leveraging, so constant debt repayment and acquisition of equity is a crucial part of every property investment strategy!

 

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!

 

 

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