Our Location-Based Property Investment Strategies in Australia
You need to consider much more than the state of the property when buying an investment property in Australia. The location plays just as big of a role in your decision. After all, a property in the wrong location won’t attract any demand. With no demand, you can’t find tenants. This leads to an investment property in Australia failing to generate the income you expected.
So how do you choose the right location? There are several location-based property investment strategies in Australia that you need to keep in mind.
Mapping the Suburb
You should already have a general idea of how much you’re willing to spend on your new property. If you don’t, then organising your budget should be your first step.
However, let’s assume you already know. Now’s the time to start looking at different suburbs. What you’ll find is that the majority of suburbs have what some professionals refer to as “preferred pockets”. These are areas where the demand for properties is at its peak.
If you buy an investment property in Australia in one of these pockets, you should enjoy capital growth almost immediately. However, you can also use preferred pockets as part of a long-term strategy. As preferred pockets become more popular, so do the pockets around them. You could buy in a preferred pocket, while also investing in some of the less popular pockets around it.
As your preferred pocket grows, you’ll reap immediate rewards. However, you’ll also enjoy long-term rewards as the surrounding pockets become preferred pockets in their own right.
Read the Data
It’s not difficult to find organisations that can provide you with the sales data for the area you’re considering. You can use this information to track how much prices have grown or fallen in a location. Many reports even allow you to break this down by month or year, often up to a 10-year limit.
So how can this help you? Firstly, it helps you to identify if the location is in an upswing or downswing. Ideally, you should avoid properties in areas that are about to swing downwards.
However, you could also take advantage of a downswing. If it looks like a location has bottomed out, you could buy a property in preparation for a rebound. The data will show you how likely this rebound is.
Check Infrastructure Trends
One of the best property investment tips for beginners is to track infrastructure trends across several locations. As a general rule, more infrastructure leads to higher house prices. After all, most people want to live in areas that offer easy access to amenities or the city.
The trick here is to look at what’s planned, rather than what’s already in place. Speak to local councils to find out what work may be planned in an area.
You’re looking for the “hot spots”. These are areas for which there are plans for infrastructural improvements that either haven’t started yet or are just beginning. Upon completion of those improvements, you should find that the demand for properties in those areas skyrockets. If you got in early, you can reap the rewards.
Avoid High Population Areas
This is one of the simplest property investment tips for beginners. The more houses there are in a location, the less demand you will experience.
It comes down to the basic concept of supply and demand. Property prices and rents fall whenever housing is in high supply. That’s because buyers and tenants have more room to negotiate because there are always going to be more options.
As a result, you should avoid areas with high populations. These tend to have a lot of supply, which means the demand is already met. Instead, look towards developing areas in desirable locations.
Check the Attractions
People buy or rent properties because of what the location offers as well as the property itself. This is where local attractions could shape your decision. A property that has a lot of nearby attractions will generally experience more demand than one that doesn’t.
So what is an attraction? On the basic level, you have things like creeks, beaches, and hiking trails. A lot of people like to have those things on their doorsteps, especially if they have families that they need to entertain.
However, you also need to consider the proximity of these attractions to the property. For example, let’s assume you’re buying a house near a beach. However, a freeway separates one set of properties from another. Those on the beachside of the freeway will command higher prices, often tens of thousands of dollars more than those for properties on the other side. In this example, it’s often best to invest in one of the lower-priced properties. They offer the same attractions, which means they’ll still be in demand. However, you pay less money to benefit from that demand.
You have to consider the location whenever you buy an investment property in Australia. After all, the location plays a huge role when it comes to the income you generate from the property.
Speak to professionals and find out as much information as you can. This will ensure you don’t end up buying in an undesirable location.
Spend Less with the Right Tactics
Information goes a long way when you’re buying an investment property in Australia. Without information, you can’t prepare for the negotiations. This is when you sit down with the seller to try and find the right price for your investment property in Australia.
However, the information you have isn’t the only weapon in your arsenal. There are plenty of other tactics that you can employ to get a good deal. With that in mind, we’ve come up with five hot investment property tips for beginner negotiators.
Tip #1 – Learn as Much as You Can About the Seller
You may think the state of the property market would make it impossible to negotiate a good deal. If property prices are going up, it’s easy to assume that all sellers you meet will ask for more money.
However, this line of thought doesn’t take the seller’s situation into account. You need to find out everything you can about the seller when buying an investment property in Australia. For example, do you know the reason why the seller is getting rid of the property? If not, then you need to find out.
Many people sell because they’re in distressed situations. They may be in financial difficulties, or need to sell quickly to fund a new purchase. You can use this to your advantage and negotiate a better deal. After all, a motivated seller is one who will listen to lower offers.
Tip #2 – Sweeten the Deal
This ties into our first tip. Sometimes, a seller wants something really specific, which will make your bid for their investment property in Australia more attractive.
Consider the following example. The seller is currently going through a divorce. It’s a heartbreaking and emotional situation, but they really need to sell their property before the divorce is settled. As a result, that seller may be looking for a buyer who can help them settle the sale quickly, so they can get on with the rest of their life.
That’s where you come in. If you limit the terms attached to the transaction, you can speed up the process. That gives you some leeway to negotiate a lower price with a seller who wants to get rid of a property quickly.
Tip #3 – Get Pre-Approval on a Home Loan
Sellers love serious buyers. If you enter negotiations knowing that you don’t yet have the money to make the purchase, you’re going to sour the seller to any offers you might make.
This means it’s best to get pre-approval on a home loan before you try to buy an investment property in Australia. Lodge your application and ask your lender to provide proof of the pre-approval.
You can then take this into your negotiations. Having pre-approval shows that you’re a serious buyer who wants to move forward. This will make the seller more willing to negotiate terms with you, which could be your pathway toward making a lower offer that saves you some money.
Tip #4 – Make the Right First Offer
The first offer you make on your investment property in Australia is crucial. Go too low, and you may insult the seller so much that he or she stops taking you seriously. Make a high offer, and you may end up spending more than you need to.
This is where your research is going to help. Find out how much similar properties in the same area are selling for. You can use this to get an approximate figure for the value of the property. Compare this to the seller’s valuation to ensure you’re both on the same page.
From there, you need to make your offer. It’s usually best to offer somewhere between 5 and 10% less than the seller’s valuation. This shows you’re a serious buyer, while giving yourself some wiggle room if the seller comes back to you with a higher figure.
Tip #5 – Don’t Mention Your Budget
Remember that your seller’s agent is going to try and extract as much information as they can from you. After all, they want to secure the highest possible price for their clients.
Talking to the seller’s real estate agent can offer you more information. However, it can lead to you giving away information that the seller could use against you.
The key is to not let the seller know how much you’re willing to spend. If they have that figure, negotiations are going to start at a much higher price than you had hoped for. Play your cards close to your chest, while still making offers that show you’re a serious buyer.
LATELY I’ve noticed a few news articles about developer incentives being offered in various markets around Australia. I’m sure many of you would have seen the headlines.
In Brisbane, the developer behind a luxury apartment project in West End is offering buyers a car – a Toyota Yaris hatchback.
Another townhouse development in Corinda, in the city’s southwest, is offering a year’s supply of avocado on toast.
Further south there have been reports of a developer behind a Parramatta apartment block in Sydney offering $30,000 in cash.
Meanwhile, in Western Australia apartment developers have been offering up to 1 million frequent flyer points, amongst other incentives.
It’s not just limited to apartment developments; incentives are offered for house and land packages too, with free gift cards or even furniture packages.
Developer incentives are nothing new, and they often serve as a warning sign to buyers that something is amiss.
But lately I’ve been wondering whether there is any upside in being lured in by the incentive carrot at this point in time. Let’s examine the issue before making a determination.
The downside to incentives
Developers generally offer incentives because they need to get pre-sales in what could be a slow or oversupplied market, which in turn enables them to get a project up and running. Offering incentives is a marketing trick to lure buyers in.
The problem for buyers is that they could end up technically overpaying for a property and then having issues with obtaining finance.
You see, the incentive is usually offered in lieu of reducing the purchase price. So if the developer offers a $20,000 car, buyers might feel like they’re essentially paying $20,000 less for the property, but they’re actually paying the price on the contract which could actually be $20,000 too much as the incentive is built into the price.
So let’s say you buy a property for $500,000 with a $20,000 incentive. You might think you’re really paying $480,000, which is probably its true market value, but you’ve still contracted to buy the property for $500,000.
When banks assess whether they will give you finance, they usually don’t take the incentive off the price – they will look at the price on the contract, and the valuation must come up to par for a buyer to get finance. The problem is that since the property is probably worth less the valuation may not be high enough for the bank to lend to you.
Put simply, valuations can fail to stack up because the property is only worth the price minus the incentive, but you’ve contracted to pay the full price.
This creates a whole lot of confusion, and the easy solution would be for developers to just reduce their prices. This would be beneficial for buyers because they can pay less stamp duty, but developers argue that buyers have come to expect incentives, so it’s a box that needs to be ticked in their marketing strategy.
Is there any upside?
If there is a cash incentive, as a buyer you shouldn’t think you’re getting a discount because you’re actually just paying what the property is worth – ie. the net price.
So if you’re not really getting a discount is it worth taking advantage of a developer incentive?
Well, as I see it, you’d have to first look at why this particular developer is offering an incentive. They might well be desperate for sales, but they also might just want to get some quick pre sales to get things moving.
You’d then need to look ahead to the future. Even if the market is quiet it could turn around in time, which means you could benefit from getting in now.
In the case of apartments there has been a lot of press about an oversupply, particularly in Brisbane and Melbourne, which has impacted prices. But many experts believe unit prices will rebound in time as the supply and new development dries up, and houses prices become even more out of reach, leading buyers to turn to apartments for affordability.
If you buy a property where a developer incentive is being offered you’d probably need a discount on top of the incentive to ensure you can get finance and you’re not overpaying. Remember you generally make your money when you buy, by buying under market value.
Most importantly, do your research
You don’t have to stay right away from developer incentives but you should absolutely do your research before buying to determine if the property you’re purchasing is actually going to be a good investment.
Whatever you buy must have the right fundamentals to ensure it will grow in the future. If it doesn’t, you should forget about it.
HOUSING affordability has been an issue for, well, what seems like forever, with Sydney a particular focus as prices have been skyrocketing.
So what’s being done about it? Well, it was addressed in the Federal Budget, the Victorian State Government announced stamp duty concessions, and now it’s New South Wales’ turn, with the State Government announcing a new housing affordability package at the beginning of this month.
It includes measures to help first homebuyers into the market, dampen competition and increase supply to put downward pressure on prices.
Before the new measures will take effect in just a few weeks, on July 1, let’s take a look at what they are and what impact they’ll have on the market.
The benefits to first home buyers
The major measure to come out of the package for first home buyers is concessions to stamp duty.
The tax has been abolished for home purchases up to $650,000 and concessional rates will apply for homes costing between $650,000 and $800,000.
It will apply for both new and existing homes, while concessions used to be only available for new homes.
Insurance duty on lenders mortgage insurance will also be abolished for all buyers, and this, combined with the stamp duty concession, is expected to save first homebuyers up to $26,857 for a $650,000 home.
The $10,000 first home owner grant will also be capped at $600,000 for new homes, but for those constructing a new home it will remain at $750,000.
What else is in the package?
The stamp duty surcharge for foreign investors will double from 4% to 8%, and the surcharge on land tax will rise from 0.75% to 2%.
For investors, the 12-month stamp duty deferral will be no longer, and stamp duty concessions for off-the-plan properties are also gone.
The NSW Government has also undertaken measures to increase supply by speeding up development approvals and council rezonings. It also aims to accelerate the provision of infrastructure to support the construction of new homes.
What impact will the affordability package have?
The affordability package has had mixed reviews since its announcement. While it has been welcomed by the industry overall, there are some criticisms.
The biggest issue is the threshold for stamp duty concessions; the argument is that it needs to be much higher to actually have an impact in Sydney. Since prices are so high, it’s not easy to buy a property under $650,000.
It’s a different story in regional areas of course, and perhaps this is the intention – to encourage people to move out of greater Sydney and to elsewhere in NSW.
Another issue is that stamp duty is still very high for upgraders and potential downsizers – ie. empty nesters – which prevents them from selling and moving on, which in turn reduces the supply available for first homebuyers or families to get into the market.
So even though there are incentives for first homebuyers, one has to wonder whether the supply will be there, even with the measures being undertaken by the NSW Government. Although of course the Federal Budget did provide an incentive to Australians over 65 to downsize, giving them the opportunity to make non-concessional contributions of up to $300,000 into their superannuation from the sale of their home, and this may help.
Another criticism of the NSW affordability package is that grants or concessions can simply create a surge in demand and the extra funds available to first homebuyers are simply added to the purchase price, so it just ends up in sellers’ pockets.
With the Sydney market already moderating, however, and supply likely to be increased, prices may not be pushed up.
Sydney price growth has already started dropping off due largely to affordability constraints and lending restrictions on investors.
According to CoreLogic, the city’s median dwelling price fell by 1.3% over May and has had zero growth over the past quarter, with growth now sitting at 11.1% for the past year, less than that for Melbourne. Sydney’s median dwelling price is now $872,300.
The other issue people will be keeping an eye on is the impact of dampening foreign buyer demand from the measures in the NSW affordability package.
Since these buyers are usually the ones developers get pre sales from, it could result in less development, restricting supply and pushing prices up.
On the other hand, foreign investors may not be put off and could still compete with other buyers, which will do nothing for affordability. Or if they completely disappear there is a risk that prices could significantly fall, as they did in Vancouver, especially since the market has already started moderating.
It’s all going to be a wait and see exercise it seems.
The affordability package is expected to be just part of the solution to the so-called housing affordability crisis in NSW, so stay tuned for the next announcement!
Investment risk and uncertainty in the real estate housing market
It’s tough being a property investor sometimes.
Where is the best place to buy? Is now the right time to buy? Will the property market crash? Has it peaked? These questions and many, many more like them can make investing in property seem a little overwhelming.
This is certainly not helped by the media. Newspapers only seem interested in selling stories about the property market going through a “boom” or writing about the possibility of a forthcoming crash.
Sensationalist headlines like “Australian Property Market Certain to Crash” to sell newspapers have become so common across most mainstream media.
Why is this a problem? Well, you see, Australia is a big place. No singular property market exists. The country is made up of many, many individual, diverse and not-necessarily interlinked property markets.
You try telling someone who paid $800k for a property in the mining town of Moranbah that is now worth $100k, that the property market hasn’t crashed yet!
Recognising the above leads me to discuss the two main markets in Australia, the Sydney and Melbourne property markets.
I can think of many reasons why the Sydney & Melbourne property markets are set for major corrections and I can think of many reasons why they aren’t.
I guarantee you that if I could find five experts to argue that these two markets are stable and will continue to grow, I could find five experts who believe a crash is imminent.
Having said that, I’m going to tell you my number 1 reason why these markets won’t crash.
Wait for it. Drum roll, please…
The number one reason the Sydney & Melbourne Property market won’t crash is….
IT’S TOO BLOODY OBVIOUS.
You see, you don’t see market crashes coming. Yet, every day at the moment I can find an article predicting that the end is nigh.
How many of you sold all your stocks just before the GFC? In hindsight, it was pretty obvious that was coming. Seen the movie the Big Short?
Any of you sell all your tech stocks before the crash?
Remember the Asian economic crisis in 1997…did you see that coming?
Well, I didn’t.
With daily comments warning that an oversupply of apartments is coming, it’s TOO obvious to predict a Sydney & Melbourne market crash.
However, there is one BIG caveat on this reasoning and it relates to gearing.
If you have bought a property in the last year or so and are borrowing or have borrowed more than 80% you may see a crash.
Why? Well for you, the market only needs to go down 10% and you have lost 50% of your hard earned money. That’s a crash in anyone’s language!
If you have borrowed sensibly and have bought in a good location, you certainly have less chance of facing a market crunch.
Using super to buy a home… Is this the dumbest idea ever?
Recently I discussed the suggestion from various politicians including Barnaby Joyce that buyers trying to break into the market look to more affordable areas. The idea that currently has momentum, however, is allowing first home buyers to access their superannuation (super) early to use it as a deposit for a property.
Currently super can be accessed prior to retirement for a variety of reasons. These include severe financial hardship or permanent disability, but buying a home is not one of them.
The idea of allowing young buyers to dip into their retirement savings keeps coming up time and time again. Liberal MP John Alexander one of the biggest advocates. That’s despite it flopping when Paul Keating first raised it back in 1993, and even he, seemingly forgetting his election platform back then, has now rubbished the idea.
In my humble opinion, it’s the dumbest idea ever.
The argument for
The point of allowing first home buyers to access their super early is of course to enable – or at least help – them to get into the property market sooner, before prices rise even further out of reach.
Advocates point to New Zealand, which has adopted this policy, and has a quickly rising take-up.
And that’s about it for the positives of the argument.
The argument against
The arguments against the idea are numerous, far outweighing the positives.
The thing is, allowing first homebuyers to use their super for property is actually likely to worsen affordability. Prices are likely to be driven up due to an increase in the capacity for people to pay for housing. So, essentially it would be counterproductive.
Not only would it likely lead to a surge in demand, with more buyers in the market, but it will give those who can already afford a house more money to play with. Meaning they’ll be able to pay more for property, driving up property prices. Existing home buyers will be the only winners.
On top of this, it would severely compromise the whole point of super, which is to provide an income in retirement.
Not only will the lifestyle of our future retirees be significantly hampered, but they’ll likely be completely reliant on a government pension. But will we as a country even be able to afford to pay all these people to live? Probably not – which is why super was introduced in the first place.
Retirees might own their own home, but what will they use to live off? Don’t forget, this includes buying food and paying for living expenses.
The reality is that most young people don’t even have enough money in their super accounts for a home deposit. A recent analysis finding displays the average super balance for young people was lower than what’s needed for a 20% deposit.
You see, you get the most compound growth in super during and after your youth. This is when you’ll grow your balance. Making it a big part of why the money needs to be left there.
So if you ask me, this is not the time to tell someone with all their life savings in a quality super fund with a mix of asset classes to take out all their money and bet on one asset class – housing. This is especially the case since property prices are likely nearing – or are at – the top of the market in Sydney and Melbourne. So the potential is there to actually lose money if overzealous first homebuyers pay too much.
What should be done instead?
Investors have largely been blamed for rising house prices and for pushing first home buyers out of the market. However, nagging proposals to get rid of investor benefits such as negative gearing and the 50% capital gains tax discount have been supposedly taken off the table.
Market forces should be left to iron out the problems in the market. But if government intervention is needed, the best solution is likely to be an increase in supply. The supply is needed especially in Sydney and Melbourne.
It would also be wise for governments to invest in infrastructure in regional areas. Or those further from the city to draw people away from our capitals and into areas where demand is not so great.
According to basic economics, when demand is greater than supply prices are pushed up. So, if supply is increased but demand stays the same prices should level out. Or at the least, grow at a slower rate.
Conversely, if you increase demand, as allowing buyers to access super would do, but keep the supply the same, prices will be driven even higher.
So, what is actually going to happen? Will first homebuyers be allowed to dip into their super in Australia?
The Federal Government has committed to addressing housing affordability. However, for now they seem to have taken this idea off the table due to widespread criticism. Although we will have to wait and see what their solution is in the May budget.
I, for one, can’t wait for the next bright idea!
National Party leader Barnaby Joyce recently hit the headlines for suggesting Australia’s affordability crisis was largely restricted to Sydney. Stating if would-be buyers were priced out of that market they should move to the country.
“I get annoyed when people talk about that the only house that you can buy apparently is in Sydney and it’s too dear,” he told ABC Radio National. “There are other parts of Australia. I live in one, it’s called Tamworth.”
He added: “Houses will always be incredibly expensive if you can see the Opera House and the Sydney Harbour Bridge. Just accept that. Houses are much cheaper in Tamworth, houses are much cheaper in Armidale, houses are much cheaper in Toowoomba.”
There was an outcry over these comments. And we saw the same when other politicians, including former treasurer Joe Hockey and Victorian MP Michael Sukkar, told wannabe buyers to get a highly paid job if they want to buy a home.
By my calculations – and anyone’s really – Joyce is right about affordability. The affordability argument does centre on the high prices in Sydney, largely ignoring everywhere else. So if he’s right, why the outcry?
Let’s look at affordability first
Joyce’s comments were in response to an international study by Demographia that ranked Sydney, Melbourne, Adelaide, Brisbane and Perth among the top 20 least affordable cities in the world.
But while these cities were all included on the list, Joyce’s assertion that Sydney is at the heart of the ‘housing crisis’ is pretty much on the money.
With a median of $795,000, prices in the city are more than 20% higher than the next most expensive capital, Melbourne. They’re nearly double Hobart, the most affordable capital, according to CoreLogic figures.
Over the past year Sydney’s prices have grown by more than 18%. But some capital cities have actually experienced falls in median dwelling prices, with Perth and Darwin seeing declines of around 5%.
Based on that alone, there’s no doubt there are plenty of more affordable options outside Sydney. And then if we consider regional areas, the affordability improves even further in many cases.
In Tamworth, situated 300 radial kilometres northwest of Sydney, the median price is just over $300,000.
So for the cost of a median priced house in Sydney (more than $1 million) you could theoretically have three and a bit homes in Tamworth.
It’s the same situation in Orange, a regional centre 200 radial kilometres west of Sydney. It’s reported young professionals are moving in increasingly larger numbers to take advantage of not only the affordability, but the lifestyle.
Is buying regional doable?
People do love to be shocked and offended in this day and age, but the main reason why Joyce’s comments upset people was not because it was incorrect on affordability, but because they felt he was being unrealistic in expecting people to move to the bush.
The argument is that people need and want to live close to work, and the jobs are in Sydney. The capital has one of – if not the – strongest economies in Australia providing lots of jobs and hence drawing people in. This demand is what is pushing property prices sky high.
While there obviously are jobs in regional areas – with Barnaby retorting with ‘bulls***!’ when faced with the suggestion that there aren’t. However, the volume of jobs certainly isn’t on par with a major centre like Sydney.
Economic growth is increasingly concentrated in cities, according to the Grattan Institute. Research shows half of the net job growth in Sydney and Melbourne over a five-year period was within two kilometres of their city centres.
Indeed, unemployment in regional areas is often higher than the 3.82% in Sydney. As two examples, Tamworth’s unemployment rate is 7.46%, while in Orange it’s only 4.48%.
But perhaps if more people moved to these regional areas, the growth of regional house buying would lead to greater employment opportunities, with more infrastructure needed and more businesses operating.
And what about the growing number of people working remotely? It doesn’t matter where these people live. They could easily move to a regional area if they’re looking for affordability. Indeed many are, in a movement dubbed the e-change.
Governments have been trying to encourage people to move to regional areas for a long time now. Unfortunately, with not a lot of success.
While many regional areas have struggled, such as mining-related towns. There are many with a wide diversity in industry that are thriving. These are the ones buyers should be considering.
If you want to keep working in Sydney you can also consider the regional areas close enough to commute. Areas such as Wollongong have seen people increasingly moving there for affordability. However, prices are already starting to rise.
You don’t have to live there
While many regional areas have a great lifestyle, a lot of people just don’t want to leave Sydney.
If this is you but can’t afford to buy your own home, do what many others are doing. Become a rentvestor and adjust your notion of what the Great Australian Dream is. This means you buy an investment first and your own home later.
Regional areas are a great option for investors, with their affordability often leading to greater returns.
And depending on the area you choose, there is the potential for significant capital growth too. Make sure you do your homework and buy in the centre of a diversified industry that has longevity and plenty of jobs.
In Orange, for example, the house price increased by 5.7% over the December 2016 quarter and 8.6% over the year according to Domain figures. Rents rose by 6.3% over the year, equating to a 5.5% yield.
Many investors continue on a path of renting for good and just accumulating properties to rent out, and this can be a great strategy.
Why do we need to own our own homes anyway? Look at many European countries, where renting is the norm – in Germany, for instance, home ownership rates are down around 40%.
Over the summer break I was chatting to an acquaintance at a friend’s barbecue about – you guessed it – property. It’s sounds like a cliché, but it’s true.
This fellow was telling me about one of his investment properties in Brisbane. He was informed towards the end of last year that his long-term tenant was planning on vacating. So he was forced to go through the rigmarole of marketing the unit for rent.
The task was made even more daunting because he had the double whammy of the lease ending in December. Yes, exactly, who looks for a property around that time of year? And it was a unit in Brisbane’s oversupplied market.
That’s right – that’s two strikes in the competition stakes. So can you see why he was concerned!
After being on the rental market for a few weeks the tenant actually ended up staying after being offered a discounted rent (it’s a long story). While this bloke was disappointed he had to drop the rent. He knew he would have lost more money if the tenant left as the property likely would have been vacant for a period of time.
So, what’s my point? Well, this whole story got me thinking about when is the ideal time to market your property for rent?
When is tenant demand at its peak?
It turns out that tenant demand is at its highest at the beginning and middle of the year. So around January/February and then again around June/July/August.
These are the times of the year that most people are on the move and looking for accommodation.
At the beginning of the year there are plenty of students starting university. Families often move just before the school year starts to get into a certain catchment area. There are also people starting new jobs.
Tenants also tend to move around this time of year because this is often when their 12-month lease from the previous year ends. They might want a change of scenery, or might be forced to leave if the owner has increased the rent or wants to.
If people often start leases at the beginning of the year it follows that the next peak period in tenant demand is in the middle of the year, as those initial 6-month leases will be coming up for renewal, and a new university semester will also be starting.
Property managers report having up to five times the usual tenant inquiry during these peak rental times of the year.
Christmas and Easter are considered to be some of the worst times to try to rent your property since many people go on holidays.
Beware that tenant peak demand times may vary from market to market. So you should ask your property manager about when demand is highest in your area.
Time your leases to coincide with peak demand times – market your property on the right month
As we know, property is all about supply and demand, and you want the latter to outweigh the former.
As such, it makes sense that if your property is available for rent at the time when tenant demand is at its highest there’ll be more competition for the available supply and hence you’ll get the best return – or highest rent – possible. You’ll also minimise vacancies. And you will be able to choose from a selection of tenants, giving you the ability to be more particular.
If your leases end in the months outside those peak rental times you have a higher risk – especially in oversupplied areas such as the inner city unit markets of Melbourne and Brisbane – of having vacancy periods, which could cost you dearly. You may end up having to drop your rent or use other incentives to entice renters.
Indeed, the rental market as a whole is pretty competitive now. So it’s wise for any investor to be timing their lease to end at peak times.
You can ask your tenant to sign a longer – or shorter – lease than the regular 6 or 12 months to ensure they expire at the right time. If your lease ends in December, for example, make it a 13 or 14-month lease so it takes you to January or February.
If you have a good property manager they should be doing this for you anyway, but keep an eye on it yourself too.
Avoid any issues with tenant shortages
Any property investor should be aiming to buy a property that is in demand from tenants all year round. And if you do this successfully, you won’t have to really worry about when tenant demand is at its peak during the year.
How do you find such a property? You need to do your research and buy in a sought-after area, with plenty of infrastructure and amenities.
You then need to target a property type that’s in demand from the demographic in the area. If the area is dominated by families that will be a house, for instance. While if it’s single young professionals, it will likely be a unit.
You should also look for other features of the property to attract tenants. Such as extra bedrooms, bathrooms, air-conditioning or extra parking – whatever it is that the demographic in the area wants.
It’s also wise of course to avoid buying a property that’s oversupplied in the area. As this means you’ll be competing with lots of other homes of the same type, with the likelihood that your rent will be decreased and vacancies will be increased.
Learning the basics before buying into the housing market
One important obstacle to remember with property investment and entering the housing market is that your entry and exit costs are quite high.
You have to consider stamp duty, your advertising and marketing costs when you sell, and the capital gains tax.
Overall, you make your money in property when you’re buying. That is, if you buy right.
If you think about the developers, they make money through buying land. When they buy the development site, that’s when they make money; if they buy at the right price.
It’s the same with property investors. When you buy into the housing market at the right time, you should be able to afford to hold the property for an extended period and hopefully over time it will generate income. If you buy something when you’re 30 years old, by the time you’re 50, hopefully your yield as a percentage of your purchase price will be 15 to 20% per annum, which is pretty good. It is like dividend growth from shares.
I know, life obstacles can often get in the way and reasons can appear that force you to sell – you will have children, you could get married or divorced. There are many things that could change your investment strategy over time too. But most people, I think, go into the housing market with the idea of owning for an extended period.
As with any other investment, you’ve got to look at making money from it. People need to understand the entry and exit costs of property, including capital gains implications. I don’t think enough people who sell properties try to work out whether they have made money or not. In order to cover all those costs, sometimes you really need to hold for a while.
A lot of investors don’t factor in the entry and exit costs when they work out their true profit. For instance, if you’ve bought a $500,000 property, you’ve got around $50,000 in entry and exit costs. So you need around 10% profit before you make money. However, once you’ve done that, it is all blue sky.
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Ahhhhhhhh, housing affordability. That old chestnut. It’s a topic that’s been hotly debated a million times over! And will no doubt continue to be for many years to come.
The general consensus is that property in Australia is unaffordable. The results of a recent survey seemed to confirm this, with the proportion of adults who own their own home falling from 57% in 2002 to 51.7% in 2014.
The annual Household, Income and Labour Dynamics in Australia survey, authored by Professor Roger Wilkins from the University of Melbourne, also found that the rate of home ownership is expected to keep falling, and may drop below 50 per cent as early as next year.
So, is home ownership falling because Australians simply can’t afford to buy properties due to hugely elevated prices, or is it due to other factors?
Property prices have significantly grown
It’s certainly true that property prices have significantly risen in Australia over recent decades.
The median dwelling price for the combined capital cities is currently sitting over $500,000, according to CoreLogic. But prices of course range widely between the capitals. Hobart is the cheapest at around $300,000 and Sydney being the most expensive at nearly $800,000.
This decade so far prices have risen across the board by 35%, and over the previous decade they rose by around 140% according to CoreLogic figures.
But since the beginning of 2010, it’s been the two major capitals of Sydney and Melbourne that have seen the majority of growth. Prices are increasing by around 60 and 40 per cent respectively (as at May this year). The other capital city markets have seen either little growth or have fallen in value, so theoretically, in some places affordability is actually improving.
This is especially the case when you consider interest rates; in this regard 2016 actually presents quite a good time to buy with the cash rate now sitting at a record low of 1.5%; very different from the double-digit interest rates investors experienced decades ago.
We, of course, also need to consider incomes in relation to price growth. Depending on who you ask, there can be a case to say housing has or hasn’t become more unaffordable. It’s clear, however, that house prices have risen faster than incomes, making it harder to save for a deposit.
Priorities are changing
While property prices have clearly risen, it’s also the case that priorities for more recent generations have changed.
Once upon a time – not that long ago really – youngsters left school and got a job, with their primary objective being to save for a deposit to buy a home.
Nowadays, however, younger generations seem to have different priorities. They often leave school with the intention of travelling abroad for a gap year (or two or three). Or if they go straight into a job they’re not necessarily saving, but buying the latest gadgets; in our modern society it’s about instant gratification.
So does that have an impact on affordability?
It makes sense that it likely impacts on the ability to save for a deposit.
We need to consider which is the cause and which is the effect, however. Some – including a Sydney real estate identity recently – argue that this generation is simply too selfish to make the necessary sacrifices, such as cutting back on commodities such as widescreen televisions and designer clothes, to save and get a foothold in the market.
But on the flipside others argue that priorities have changed simply because it’s impossible to save the huge deposit required for property these days. So younger generations are instead deciding to spend their money on something else because property is out of their reach.
But are the expectations of younger generations now just too high? When they complain about property being unaffordable, is that because they want to buy a flash pad in inner Sydney as their first home, rather than buying something further from the city in a price bracket they can actually afford? Essentially, many want to buy what would traditionally be their last property – often what their parents have worked their way up to – first.
Add to all this the fact that renting has also become more socially acceptable. The Great Australian Dream perhaps fading a little, and we have a little more insight into the affordability debate.
Consider your options
It’s clear that the debate around housing affordability isn’t clear-cut; there are many aspects to consider. As the debate continues to rage, demands for reform or government measures to curb price growth will persist.
While Australian property prices have risen and are unlikely to fall (despite claims from doomsayers), leading many to feel as though it’s impossible to break into markets such as Sydney, there are always more affordable opportunities within each capital city if you care to look. Consider buying further from the city, or a unit instead of a house. Scale down your expectations and buy where and what you can actually afford.
And if you don’t want to scale down your expectations, become a ‘rentvestor’. This means you choose to rent where you want to live and invest where you can afford to buy.
For investors, it’s of course better to buy where there’s more potential for growth. Chances are that’s in an area that hasn’t already seen huge growth. Yet where there are lower prices with more room to move.