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

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!

 

6 reasons to get landlord insurance

Tuesday, September 26, 2017

 

It’s time for property investors to think like disruptors

Wednesday, August 09, 2017

By Margaret Lomas

Disruption is the buzz word of the millennium. Until the turn of the century, it was a word used mainly to describe unruly kids in classrooms, or the traffic chaos you encountered on the way to work. These days, we embrace the word as something to respect and seek out, and if you’re a disruptor, you’re likely to be highly revered.

But disruption still has a down side, and for property investors, disruption in the real estate industry is hurting. As the government introduces integrity measure after integrity measure, in an effort to cool down some of our more heated markets, property investors are taking beatings around the head without any sign of let up.

First, it was lending. The banks tightened up their borrowing criteria, effectively allowing investors to borrow less than they could one year ago. Next came the interest rate bashing, with investors singled out to be charged higher rates of interest on their investment loans.

Then we saw less money being made available to investors, as ASIC put pressure on lenders to cap their investor lending. Many small lenders stopped advancing loans to investors at all for a while, and this took some good deals out of the market place.

And then, as if we had not had enough, the sword was plunged more deeply when the latest budget announced that it would remove plant and equipment deductions for investors of established property. This one is not yet finalised, and although the effective date for implementation has passed, the government is still calling for submissions to assist them to fine tune this little piece of legislation.

Desperate times call for desperate measures, and it’s time for property investors to begin to think like disruptors themselves.

Firstly, just staying in the market with determination will call for you to acquire somewhat of a disruptor mentality. I’ve had many potential investors telling me that they just won’t bother now, as there are too many roadblocks making it harder to achieve success. Once you have decided that you’ll press on, you’ll become part of a shrinking group of people determined not to let barriers get in your way.

Next, begin to think about how you can fine tune what you have done so far to improve your cash flows and outcomes. In my case, I have taken a look at what can stay and what needs to go from my portfolio to make way for property opportunities with potentially better outcomes. I am looking at selling a few plodders which have already made money but don’t outperform, and using the money to potentially improve some of what I am keeping, as well as acquiring different properties elsewhere. 

Part of the fine tuning involves seeing where in my portfolio I can improve my cost of borrowing. I am assessing what is out there where I can get cheaper rates, and then I’ll hit my current bank to match that before leaving them entirely. I’ve avoided this for so long, merely because the effort required in a portfolio of my size is enormous, but I’ve now put aside a couple of days to attack this task with vigour.

Lastly, and most importantly, disruption must come about with some creative thinking on how you’ll go about adding to your portfolio. For example, if you can afford to buy two properties, should you instead look at buying one on a bigger block and adding a second dwelling to improve cash flows? This one action will not only add a property with full plant and equipment deductions (when you add the second dwelling), it will add substantial cash flow as the cost of the second dwelling will be the build cost only, as you’ll already have the land. What about an existing property that you can easily convert to two units? I’ve seen this done really well before, and it could be something you can do.

And now, with plant and equipment deductions available for anything you add to an existing property, what kinds of renovations can you do to improve your rent return and receive additional deductions? It’s time to examine what you already have with a view to improving its performance.

The most important thing you can do as a disruptor though, is to not lie down and accept it all as fate. Things will change again, as they always do. There will be more challenges ahead, but also positive changes that you will benefit from. If you knuckle down now, when it’s hardest, and decide to still invest (even if you have to sacrifice a few things to make it happen), you’ll be the one who didn’t let disruption affect you negatively. Someone who has a better financial future than the average Australian.

 

How the Budget will affect property investors

Tuesday, June 06, 2017

By Margaret Lomas

The proposed Federal budget 2017 stopped short of removing negative gearing for property investors, but it did contain some surprising changes which no one really saw coming. There had been a considerable amount of industry stakeholder collaboration with the government, yet they pulled a pretty unpalatable rabbit out of the hat at the finish line, and many of us are now scrambling to make sense of some of the proposals.

In a nutshell, here is how the budget will affect property investors.

Travel expenses

Property investors can no longer take a tax paid trip to inspect their property twice a year.

In my opinion, this is a good decision as this was a costly rort, which did little more than provide two tax paid holidays a year to investors and a great opportunity for property spruikers.

Those spruikers would market often over-priced property in divine tropical locations to willing investors on the basis that they could get a holiday on the tax office just for going to inspect that property. Such an incentive often stripped the investor of their ability (or desire) to even assess the true investment potential of the underlying asset, and the fall out has been that a considerable number of investors now hold property worth far less than they paid – and they are tired of holidaying there.

While the occasional investor took only bona fide inspection trips, this was one benefit which was often abused, and it is a fair decision. For those investors now worried about how they will be able to inspect their properties, remember, you are a property investor, not a property manager. Build a good team of people in the area where your property exists and have them do this menial work for you, while you use your time to seek out more investing opportunities.

Plant and equipment depreciation

This is the one that will hurt the most. While investors retain the right to claim the depreciating value of the building (capital works deduction), they are no longer allowed to claim any fixtures, fittings and furniture, unless they are the original purchaser of that asset.

So, if you build a new property, you essentially are the first owner and so you can claim the building and all that is inside. If you buy from someone else, you no longer get the new effective life (or the remaining value) of the plant and equipment, although you still get the remaining building write-off.

If you scrap items to replace them, you cannot claim the residual value of the scrapped items as before, but you can then claim the new items which you buy, and so a renovation still carries significant benefits. On all property, you can still claim capital works deductions on a structural improvement which you, or someone else, does.

To some extent, I think this is also a step in the right direction, but there are holes you can drive a Mac Truck through. In its present form, an investor can buy a property which has, say, 15-year old carpet, and engage a quantity surveyor to asses its present value. Hence, the investor gets what is known as a ‘new effective life’ on the asset, which gives a further 10 years of depreciation on the second-hand value. Theoretically, that carpet could be depreciated forever under the old rules! So, in my opinion, it’s fair to scrap the ability to get that new effective life on an old item of plant and equipment.

However, if you buy a property which is, say three years old, the original owner of that same carpet has only depreciated it for three years of its 10-year life! It doesn’t seem fair that the new owner cannot at least claim the remaining seven years, especially since they are allowed to claim the 37 years left on the building depreciation. Depreciation schedules for capital works, plant and equipment should belong to a building, and pass to the next owner to depreciate what is left of its original value. This will still be a fabulous integrity measure, but more sensible and easy to implement.

It’s a flawed change, and it needs better clarification. It also raises more questions than it answers, and opens more loopholes than it closes. If you buy a second-hand item (such as a refurbished hot water heater) to put in your second-hand rental house – are you the first owner of it, or does the item have to be new to qualify? And what stops me from buying a property under two contracts; one for the house and land and one which itemises a purchase price for each and every item of plant and equipment? Am I then the one who ‘bought’ the items, and can I claim them?

CGT

While a potential change to Capital Gains Tax (CGT) was mooted, it surprisingly remained unchanged and still offers a 50% discount after you hold the asset for 12 months or more.

Other property-related matters

Other measures which do not necessarily directly impact on property investors include:

  • Those over 65 who sell their homes with a view to downsizing can now contribute up to $300,000 of the proceeds to super as a post-tax contribution;
  • Super borrowing, which is one of the fastest growing areas of lending, has been left alone. This is still allowed BUT borrowed funds are counted in the 1.6m contributions cap;
  • First-home buyers can use their voluntary super contributions to buy a home, but, unlike the now defunct First Home Saver accounts (which were a miserable failure), there are no contributions from government and there is a maximum contribution for home buying purposes of $15k per year and $30k total. Just like its predecessor, I can’t see this having a great rate of take up;
  • Buyers of ‘qualifying affordable housing’ get a 60% CGT discount after 12 months. We will wait to see exactly what these properties look like and how they will be delivered as there is little information around what will constitute a qualifying affordable home. Last time this idea was implemented under the National Rental Affordability Scheme (NRAS), all that happened was that greedy developers built NRAS property, sold it above market value to individuals (even though the scheme was intended for institutional investors) and flooded the market, reducing demand. A lot of mum and dad investors lost a considerable amount of their net worth buying these properties. 
  • Buyers of any property over $750,000 must withhold 12.5% of the purchase price and remit it to the tax office, unless they cite a tax clearance certificate from the vendor proving they are not a foreign resident. This certificate must be produced even if you know they are not a foreign resident. The onus is on the buyer to withhold and remit this tax.

For property investors, the proposed changes will be grandfathered for anyone who owned, or had signed a contract for, property prior to budget night, 9 May 2017. Of course, this all has to be passed yet and it is just a proposal, but given the desire by the Labor party to make sweeping changes to negative gearing, I highly doubt it will be met with much resistance.  

What remains to be seen is just how the anomalies are dealt with and how it is all implemented. Discussions are underway with key industry stakeholders, so we wait with bated breath to see just what will transpire. Once I have more information around these changes, I’ll write them up in another article, so look out for that.

 

When it comes to property, are you a leader or a follower?

Tuesday, April 04, 2017

By Margaret Lomas

I definitely subscribe to the practice of ensuring that you have a good team of people to help you on your investment journey. However, I also need to point out that if you are just starting out on your property investment journey, it’s not enough to simply follow others in where and how they invest.

You can’t become a successful investor if all you ever do is attend seminars, buy what is on offer, or listen to the secrets being spruiked as if they were gospel truth. If this is you, then you’re only ever going to be getting the leftovers, or buying in areas where the person who makes the most profit is the one who sold the property to you.

Let me tell you about a client of mine. When Susan and Martin came to my company for assistance, they already owned six properties and seemed to be doing pretty well. They had purchased all of them from a mortgage broker who had gotten them some good deals on some loans, who, in turn, had links with a developer that meant that he received a handsome commission for each sale that he helped effect. Therefore, all of the properties that Sue and Martin owned were in one area and all were very similar types – townhouses purchased off the plan. 

In truth, Sue and Martin were being spruiked without realising it was happening. They trusted this broker and he never mentioned the sizable commission, as the law doesn’t require him to. When I quizzed Sue and Martin about whether they thought they were good investments or not, they didn’t really know, and when I asked them about why they had purchased them, they couldn’t really answer that question either. It was fantastic that they had seriously started to invest, but there were a number of issues. Let’s break them down:

  • All the properties existed in the one area, which meant if that one area slowed down, all of their properties would also slow and further leveraging would be difficult.
  • Most investors, after purchasing six properties, would be becoming more knowledgeable and self-sufficient, but as Sue and Martin had relied totally upon this one adviser, it meant that they were not developing as investors. Investors who develop skills along the way are more likely to be those who also recognise hotspots before the crowd does.
  • In Sue and Martin’s case, they had also met significantly higher buy-in costs due to the commissions along the way, which have to be funded somehow, and it’s usually the inflated price which does that. This placed them further behind in terms of equity acquisition.

While you must have expert guidance and input – and gaining some good education and mentor support is a crucial part of the plan – you also have to know how to approach the task of building a property portfolio on your own. You also have to learn how to find the areas and properties which are most likely to do well, despite what’s happening in the overall economy.

Your adviser or mentor can’t be with you every minute of the day. Sooner or later, it’s important to be able to find the areas on your own – and before others do – and make property choices without being shown what to buy, and where to buy it. You won’t be able to do this if you have to constantly ask someone else where to buy or what to buy. Only when you learn how to do your own research, validate what you find, and then interpret the results in terms of what makes good buying, will you begin to experience the kind of success which sets a successful property investor apart.

That’s not to say that you must become an island. I know from experience that success is enhanced when you have the support of the right people, and when you spend some of your time, at least, networking with like-minded people, attending quality events and adding to your knowledge on a regular basis. My company has thousands of clients, many with similar financial circumstances, but all with vastly different success rates with their property investing. They all have access to the same level of knowledge and support, but we have found that those who attend everything we offer, and seek out support on a regular basis, are those who have the most success.

Make the decision today to become as educated about how to buy property as you possibly can, and then commit to a plan which allows you to in some way work upon your property investing strategy every day. By being in what I call the ‘property headspace’ as often as you can, you’ll become a property investment leader with an exceptional portfolio and a secure financial future.

 

Investing in property for income and growth

Tuesday, March 14, 2017

By Margaret Lomas

The debate about whether you are a cash flow property investor or a growth investor has been raging as long as property investors have been around. I’m not personally a believer that you must choose one over the other – my own portfolio is full of properties chosen for the fact that they had the capacity to grow in value while they delivered a healthy positive cash flow to me, and they’ve all done just that.

Flowing on from that is the incorrect notion that if you found a property that had a high positive cash flow, which also indicated a high yield in relation to purchase price, it would be in an area like a regional town, with potentially low growth. The reverse notion also applies – if you want growth, you have to buy in a big city.

In fact, property with good yields and potentially high cash flows does exist in high-growth areas, and high growth areas with good yields are found all over Australia. And so, property investors need to understand that, when they buy property, it should not necessarily be with the aim of getting ‘good growth’ or ‘good yields’. It must be for both. The choice about what to buy should relate to the characteristics of the property and area.

Having said all of that, you should know that cash flow and growth, while they can happen in the same area, rarely happen at the same time. This is because the factors which contribute to each of these events are different. Let’s take a look at what those influences are.

Cash flow influences

The potential to achieve a good cash flow on a property is impacted by a number of factors, including how much access to depreciation an individual property has, an investor’s own marginal rate of tax, and the interest rates of the day.

Of equal importance, is the potential yield for property in an area. This will be strong, and increase, based on the following factors:

  • A new industry or large employer coming to the area and improving employment prospects. The result of this is that people initially move to the area for the work, and rent in that area. It takes upwards of two years for these people to consider becoming permanent residents, at which time they are likely to make a purchase decision if the area presents enough employment opportunity and community amenities.
  • An under-supply of rentals available and low vacancy rates. These areas are not ready for the influx of new people and existing property feels the brunt of this sudden growth. Vacancy rates tumble and landlords are easily able to increase rents in response to this.
  • An adjacent city or town having rents too high. Once rents and prices grow in an adjacent city or town, people will move outward to those areas within easy commuting distance, and that area then experiences pressure on its yields. Those moving are more likely to initially rent, as many of them may have plans to eventually buy in that original area once they can afford to do so.

Growth influences

Property value also grows as a result of a number of factors:

  • The growth in the existing population. This, however, will lag behind that initial boost in population which comes from migration, as migration usually impacts yields first. Population which is growing organically, as a result of people who have made ties in the areas and are starting to have families, is the kind of population growth which usually results in property prices moving higher.
  • The increase in demand from buyers. This is linked to many factors, including population growth and the establishment of industry. I often find that an area where small businesses are growing is an area where property prices are on the move, since the advent of more small business is a sign of intrinsic economic growth.
  • An under-supply of listings in the area. This occurs where population is growing organically, putting pressure on existing properties.
  • The solid establishment of diverse industry. This is opposed to the increase in size of a single industry.
  • A vibrant local economy. This refers to an area where the residents are becoming more affluent and incomes are growing.

When these factors exist, people choose to settle in an area, and when they do so, we see a real increase to property values which is sustainable and consistent over many years.

As an investor, you must first work out what you need, at the exact time you’re buying. Are you at the point in your investing life where cash flow is of prime importance, or is it growth you need? Maybe you can buy one or two properties with growth, then one or two with cash flow, and so on. You must plot yourself on a yield/growth continuum and be guided by those needs when it comes to area selection.

Narrow down those areas which have the best prognosis for investing success, and then eliminate those which cannot satisfy your immediate need for either cash flow or growth. As you carry out your due diligence, you will pop areas onto your list which are from both the regions and from the cities, that have a strong yield or strong growth prognosis.

Your ultimate selection must not rely on whether it’s a city-based or country-based property, the price, whether it’s favoured by others, or whether you’ve read about it being a hotspot.

Your selection must be due to the area’s ability to ultimately deliver both cash flow and growth, and your needs right at this time (i.e. which is most important to you).

 

Property growth drivers

Tuesday, February 07, 2017

By Margaret Lomas

When it comes to property investing, the term growth driver is bandied about pretty much everywhere. A growth driver when it comes to property is a characteristic which
impacts positively on both yield growth and value growth.

Past growth is not an indication of future growth, and so if you are presently looking at historical data about how an area has performed over the past five years, it’s not going to help you much. On the contrary, historical data may well tell you where not to buy, since it’s likely that strong past growth means that the best time to buy has already passed.

To buy a property in an area with all of the necessary characteristics for sustained growth over time, you must know the important difference between ‘intrinsic’ and ‘extrinsic’ growth drivers. By being able to place the economic data you are reading into one of these two separate groups, you will be able to make a stronger prediction about the future potential of that area.

Extrinsic growth drivers

Extrinsic growth drivers are the economic influences which contribute to the growth of an area, but which originate outside of that area as a result of influences occurring elsewhere. They are not a result of any micro economic change within that area, but they do come from activity, planning and events which occur temporarily.

When a large infrastructure project or a major building project is planned and executed in an area which has a smaller population, there is generally insufficient local labour available to fill the jobs which are being created. Often, workers will come from surrounding areas, or even from interstate, and for the period of the project, they will be living in that area, most likely in rental accommodation.

This will place a temporary pressure on many of those economic factors which normally result in property growth. The retail and hospitality trades will improve as these new residents spend what they are earning, injecting it into the local economy. Rental accommodation will experience short-term stress and vacancy rates will plummet. A derivative of this will be house price increases – potential landlords witnessing the plunge in vacancy rates may see this as a sign of an impending house price boom and buy into the market, creating pressure on prices. The population is boosted by the new workers, often bringing their families, and the economy enjoys a burst of activity.

To the untrained eye, the features of a strong and growing micro economy will be evident, and the temptation to get in quickly and on the ground floor creates a pseudo demand that can look like a true economic boom.

When the project completes, the workers move on to the next project, and the vacancy rates begin to rise. The funds which were being injected into the economy also dry up and many small businesses, which may have started up or flourished during the building of the project, close down. Pressure is removed from property prices, and in fact prices drop, as distressed landlords sell up. Often, values can return to ‘pre boom’ days, and investors are left with property that is difficult to rent and hard to sell.

Similar results can come from other external sources. Pure investor sentiment, where the rumour is circulating that an area is heating up and investors from all over the country vie for a small pool of available properties, can create a short-term property demand which places a false reading on true house price growth. Equally, property developers who buy up cheap parcels of land, subdivide and then engage clever marketing companies to sell the properties – often to buyers from outside of the state – can also create an impression of potential growth which is never backed up by true economic vibrancy.

Intrinsic growth drivers

Intrinsic growth drivers are those factors which affect growth, but which are organic, sustainable and consistent. These are the economic influences which are created by a complete set of circumstances, rather than single, individual events. They are influences which can be repeated and sustained over time, and which are a sign of underlying economic growth.

Intrinsic growth drivers include

·       Population growth from residents moving into town attracted by factors other than short term employment.

·       Changing demographic mix, where the types of people who live in town are becoming more diverse. A growing area needs young people, families and retired people to create a community. Generally speaking, it is community which provides stability. Areas with a concentration in one demographic category typically grow less well than those which are more diversified.

·       Improved accessibility to the area through transport infrastructure and upgrades.

·       A strong and articulated council development plan, providing services and infrastructure for that growing population.

It’s the depth that counts!

You can see that it’s an important feature of property investing to understand that success is not just about looking for ‘growth’ any more than it is just about looking for cash flow.

It is about the depth with which you can gather the important economic data to be able to assess the true potential of an area. Doing so will provide you with a safety net of sorts, and allow you to stay in the market over the long term by considering all of the financial implications a purchase will bring.

You don’t need hundreds of properties to ensure a solid financial future. You don’t even need dozens of them. Eight to ten well researched and chosen areas, with sustainable growth and short-term yields high enough to manage interest rate rises and vacancies, will result in a solid, growing base of assets which will give you more choices in retirement than you ever imagined.

 

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