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.
When it comes to purchasing property there are a multitude of factors to consider. Where should you buy? What should you buy? How much should you pay? While these are the most common questions investors will ask, perhaps one of the most pertinent questions that needs to be answered before anything else is ‘Why should I buy?’
To put it more clearly, you need to have clear goals for why you’re investing in property, and then devise a strategy to help you achieve those goals. Surprisingly this isn’t something many investors do, but it’s essential for success.
A large part of your strategy will be determining whether you need to buy properties that offer strong capital growth or rental yields.
There are those in each camp espousing their respective benefits, but which one takes precedence is often different for each investor depending on their financial circumstances. Ultimately, however, every investor should be aiming to acquire a property that offers both – not one or the other.
Capital Growth Property
Having a capital growth strategy means you’re aiming to buy a property that experiences strong growth in value over time.
A property that has the best chance of growing in value is one for which demand outstrips supply. It’ll be in high demand due to its investment fundamentals – that is, it’s in a good location, close to employment, amenity and public transport, and there are imminent growth drivers such as infrastructure projects.
Often properties with high potential for capital growth have lower yields and are therefore negatively geared, with expenses exceeding the income.
Having a high-yield strategy means you’re aiming to find a property where the rental income covers most, if not all, of the costs associated with owning it.
While the capital growth on these properties will often be lower, they won’t cost you as much to hold.
Having a strong rental return is more important than many investors realise because it enables you to hold onto a property for the long-term while you wait for capital growth. If your portfolio is too strongly negatively geared you can run into financial trouble – if interest rates rise, for instance, or you have a big unexpected expense, you’ll be forced to find more to pay out of your own pocket.
Can you have it all?
Believe it or not, you can have a property that offers both good rental returns and capital growth.
It may not be easy to find, but if you do thorough research the right property in the right location will provide both. That’s not to say a high-capital growth property will necessarily provide an investor with positive cash flow, but it may be only minimally negatively geared after tax deductions.
What you should be aiming to buy is a property that offers the best possible cash flow for the best possible growth. You need both to invest as the former will keep you in the market, enabling you to service the debt, while the latter will eventually get you out, enabling you to realise a profit.
If you can’t find a property with both capital growth and a solid yield from the outset, then find one that has all the fundamentals for capital growth and where the yield is likely to increase soon due to strong rental demand.
Your yield can also be improved through measures such as minor renovations, adding extras or even by furnishing your property (for more on this see our upcoming blog providing 13 suggestions for maximising your rental yield).
How can you decide which to prioritise?
The broad goal of property investing is to create wealth over the long term, and it’s clear that focusing on capital growth is the way to do this.
While a property investment’s yield is crucial to its success, it’s not the key to wealth creation, and when investors make the mistake of prioritising yield over growth, they usually end up losing money.
High-yielding property might seem tempting, but when you do some simple calculations it’s evident that in the long-term you’ll make more by focusing on capital growth. Not only will your property be worth more, but the rental income will also be higher. Consider the following example:
||Value in 20 years
||Income in 20 years
|Capital growth strategy
Capital growth will also largely be the key to expanding your property portfolio;
it will give you equity, which you can leverage off to buy more real estate.
While capital growth is the key to creating wealth over the long term, you will also need to be able to service further debt with subsequent purchases, and that’s where rental yields come in.
Ideally with each purchase you’ll be aiming to have both strong capital growth and decent yields, but if you have a portfolio of properties you may also opt for balance – that is, to have some that are negatively geared and some that are more cash flow positive. The surplus cash flow from the high-yielding properties can be used to cover the costs of the low-yielding properties.
Tax deductions can also help you service debt and hold your property, minimising any shortfall between rental income and expenses.
Just how much of a shortfall you can afford will depend upon your circumstances at the time you buy. If you don’t have a great deal of surplus cash you’ll need to look at focusing on high-yielding properties so your holding costs are smaller, while someone with an adequate surplus will be able to comfortably meet the shortfall between rental income and the costs of holding the property, and will be able to focus on a capital growth strategy.
This may change over time – once you have acquired a few high-yielding properties your improved cash flow might allow you to focus more on capital growth.
Shhhh…Off Market is the New Black
Shhh… Off-Market is the New Black!
Recently we re-entered the property market looking to upgrade from our unit in Bondi to a house.
We’ve been looking for a house around the Bondi area and I must say I am surprised that realestate.com.au and domain.com.au are still in business.
You see, everything that looks half interesting at the moment is being promoted as an “off-market” transaction.
Here’s what I’m thinking
If I receive an email from an agent where I’m part of a big group database and I’ve received it as a BCC – it’s pretty much ON the market.
If the agent has signed an agreement with the vendor to sell the property, it’s ON the market.
The other day I even received an email from an agent in Queensland trying to sell units off-the-plan on the basis they were Off Market.
So I queried an agent the other day, as nicely as I could, asking how it can be “off market” when the I’m receiving a group email promoting the property.
The answer was that the vendor didn’t want loads of people inspecting his house in Bondi.
“Oh nooooo I’m selling a house in Bondi please don’t let all those pesky buyers come to my house and drive my price up”
Now before every real estate agent gets stuck into me….I’m sure there are legitimate “off market” deals…BUT I think the term is becoming about as overused as a waiter saying “enjoy” every time they bring me my food!
I suspect the real estate agents saw that buyers agents were making money using this term and thought “we can do that too”.
So they go to there database with an “off market” email, create interest – then put it up on realestate.com.au and hey presto… Boom!!
Suddenly the vendor doesn’t mind those pesky purchasers, they are even leaving the scent of coffee or perhaps some incense wafting through the house just before the open.
So, buyers beware… “Off Market” is the new black.
Where should you buy property in 2016?
AFTER a few years of strong growth Australia’s property market appears to be cooling.
But this doesn’t mean investors should shy away from buying; in fact, it’s just the opposite.
It’s an opportune time to buy due to slower price growth and a record low cash rate, and while the overall market is experiencing a slowdown, there are always with growth potential to be found.
Where are they? Let’s first take a look at what’s happened over the past year before gazing into the crystal ball.
The current state of play
Property prices grew by 7.8% over 2015, with Sydney and Melbourne leading the charge, according to CoreLogic RP Data figures.
Sydney values were up by 11.5% at the end of the year, while Melbourne values were up 11.2%, despite both seeing a slight drop in values over the last quarter.
While Sydney was the standout performer at the start of last year, Melbourne has now started to take over.
In the first month of 2016, Victoria’s capital saw growth of 2.5% compared to 0.5% in Sydney, and the performance difference between the two over the past six months has been significant, with Sydney seeing a 0.6% drop in values and Melbourne seeing a 3% rise.
Outside these perennial favourites, over 2015, there was little growth in other capital cities.
Brisbane and Canberra saw a moderate increase of 4.1% in property values, while the other capitals all had fallen. Perth and Darwin experienced the biggest declines of 3.7% and 3.6% respectively.
What’s in store for 2016?
Many experts believe the property market is likely to be slower this year, with subdued growth and lower rental returns.
Affordability will be a factor hampering growth in some markets, particularly Sydney and Melbourne, where the median dwelling price is now $776,000 and $595,000 respectively, according to CoreLogic RP Data.
Another factor impacting demand is the regulatory crackdown in the mortgage market, which occurred in 2015 and has led to higher interest rates, particularly for investors, who have since scaled down their activity.
Despite expectations of softer conditions this year, dwelling values did experience a small rise of 0.9% in January, according to the CoreLogic RP Data Hedonic Home Value Index, which could be an indicator they won’t fall.
In any case, we know that the property market is never a ‘one size fits all’ and with so many submarkets there are always areas experiencing growth.
Investors need to start by looking at a state level before drilling down to individual suburbs and then even further into pockets within those suburbs.
Which states will shine?
While Sydney and Melbourne have come off the boil, their strong economies are expected to see property price growth level out rather than fall this year.
Other states are due for some stronger growth, however, and the one coming up on everyone’s radar is Queensland.
The south-east corner of the state is the area many are picking for growth over the coming three to five years.
Growth in South East Queensland over the past two years has been slow and steady, and predictions are that this will continue.
Interstate investors are being drawn to the area largely due to its affordability and higher rental yields.
Not only are prices in Brisbane around 40% cheaper than those in Sydney, with the city having a median dwelling price of $478,200, but property is also substantially cheaper than in Canberra, Darwin and Perth, which have median dwelling prices of $587,500, $520,000 and $515,000 respectively, according to CoreLogic RP Data.
The Perth and Darwin markets aren’t expected to experience growth in the short to medium term – and in fact, may experience further falls – but this means there may be some good buying opportunities at the moment for those looking at the long term.
Adelaide and Hobart have been ticking along steadily and the affordability of these areas means there are opportunities for investors looking in the right areas.
Hobart, which has the most affordable median dwelling price of all the capitals, some 20% lower than Adelaide, is already showing signs of growth with a significant 4.7% rise in dwelling values over January alone.
Canberra also experienced growth over the first month of this year with a 2.8% rise in dwelling values.
While experts warn the latter two markets are more prone to ups and downs, there are opportunities for investors, particularly for those looking for higher rental returns, with Hobart having the highest yield of all the capital cities at 5.4%.
Depreciation on Holiday Homes
Go on holidays and claim depreciation!
The ATO has recently announced a crackdown on property investors over-claiming deductions on holiday homes, this includes depreciation.
If you’ve been on holidays, it’s very easy to get caught up in the romance of owning your own holiday home.
Purchase price, stamp duty and mortgages offset by the rental income can make it look good in the halo of optimism that comes with the first flush of real estate lust.
The “we have got to have it and we will make it work” compulsion is common when purchasing lifestyle properties.
Holiday houses can be depreciated if they are rented out to a third party but that doesn’t mean you can’t stay there when you want to.
As long as it’s available for rent most of the year you can block out a two-week period over Christmas and claim the depreciation pro rata.
You are still entitled to that deduction regardless of how many weeks the property is actually rented out, as long as it was available for the full 50 weeks.
TIP – Make sure you pro-rata any depreciation claim if you have used the property personally.
If you own a holiday home – make sure you start the ball rolling with a depreciation schedule by getting a quote here.
Why the ATO is wrong
The other night in bed….I was reading an article on the ATO Website (yes I’m a bit weird), titled “Where do you get the construction cost information?”.
I was a little shocked when I read the last paragraph that stated “Note: Remember to obtain your construction costs report as soon as possible as these reports can take a long time to prepare.”
At first I thought, wow even the ATO recognises that it’s not always that easy and fast to:
- Get all the information required to prepare a report (Including any work carried out by the vendor or previous vendor if handed over at settlement
- Liaise with the tenant and property manager to get access
- Inspect the property
- Compile the data
- Prepare the actual depreciation schedule
The other issue is that Quantity Surveyors get inundated around June and then are quieter from November to February.
So, Washington Brown is committed to proving the ATO is wrong and here’s how.
We have a 7 day guarantee!
This means: after we have received all of the required information AND completed the inspection for the property we will have your report completed within 7 days!
The key here is do it now! – You’ll get your report within 7 days guaranteed if you order your report here now!
There are a myriad reasons why I have been drawn to property. Here are the 6 main reasons why I love property:
Reason # 1 – You can add value
One of the principal advantages of investing in property is that you can buy a rundown old property and increase the value of your investment by getting your hands dirty, or paying someone to get theirs dirty!
In comparison, it would be hard to add value to the Commonwealth Bank shares I own. Sure, I bank with the Commonwealth, but I don’t think my day-to-day savings account is going to add much value to the bank’s profits and in turn increase the value of my stock portfolio. Admittedly, I can vote when it comes to the company’s annual general meeting, but are the voting rights attached to my 1,000 shares really going to make a difference?
Installing new carpet, painting and adding new blinds that will make an immediate difference to the returns on a property.
Reason # 2 – There is limited supply
A builder once said to me, “You can’t make property from a plastic mould”. I like the fact that property takes a while to plan and build because, in my opinion, the demand and supply equation has a lot to do with the price of property.
A development across the road from where I live in Bondi has been ‘in council’ for three years now. This means it has taken three years for all the planning approvals to be passed – before construction has even started. And it will probably take two more years to build. That’s five long years for the developer.
With shares, however, the company can make a capital raising at any time or issue options to directors or employees. This type of activity can dilute your shareholding making your piece of the pie smaller.
In contrast, you or the government can’t just issue another house and lot or land package in Bondi or any suburb you happen to like.
Reason # 3 – There are some capital gains tax exemptions
Unlike any shares I currently own, the home I live in does not attract capital gains tax (CGT) when I decide to sell it. The sale of your principal place of residence is one of the only assets that you won’t pay capital gains tax on. This has proved lucrative for many Australians, and I can’t see the law changing in this regard for a long time.
Reason # 4 – It’s easy to KISS (Keep it Simple, Stupid)
I like property because it’s easier for me to understand compared to shares or other types of investment. Granted I work in the property industry, but I know if I buy a property for $500,000, I can get $600 a week rent. There will be expenses that I can work out and I can use the Washington Brown depreciation calculator to work out my depreciation claim. Simple.Have you ever read a share prospectus or company annual report and completely understood it?
Reason # 5 – I am master of my own domain
I like property because I can be the master of my own domain. I can be the CEO of my property portfolio, the CFO of my investment and answerable to the board directors that I care about – my wife. I don’t know about you, but I’m pretty sick and tired of golden handshakes to CEOs who have done the wrong thing to their staff or shareholders. I’m over self-interested company directors who pretend they have shareholder company value at heart. Do they really? As the CEO of my property portfolio I can guarantee I’m looking out for number one!
Reason # 6 – It’s not a constant reminder
I like property because I’m not reminded of how much I have lost or made every day. Regular sharemarket updates in the media mean you are constantly aware of the gyrations of the market and the value of your shares. And it’s really not necessary. I personally don’t wake up and wonder what the Nasdaq did overnight and I don’t want to worry about how that’s going to affect my share portfolio – if at all. If I need to have my property valued for any particular reason, for example if I plan to sell it or borrow against it, I will employ the services of a valuer. At all other times, as long as it’s not causing me any problems and the tenants are paying their rent, then I’d prefer to let it appreciate in value in the background without being a constant reminder.
Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.
This blog is an extract from CLAIM IT! – grab your copy now!
I often get asked “How did you come up with the name Washington Brown?”
It’s a good question and I wish I could take credit for the name (it’s memorable and has a touch of class about it – don’t you agree)?
Well, meet the Brown in Washington Brown, Mr Antony Brown to be precise.
Many, many moons ago, Tony, as he likes to be called, had the option of calling the company Tony Brown & Associates — like every other law or QS firm did back then – or to think bigger. He chose the latter.
At that time there was a developer down the road, Patrick Yu, who called his company Sterling Estates and had other entities like Winchester Homes.
This is where Tony got the idea and came up with Washington Brown.
Tony is no longer involved in the business – more on that later.
I have thought about changing it to Washington Hyde…but it just doesn’t have the same ring to it. Don’t you agree?
Follow the Golden Rules of Property Investment
Have you ever thought about writing something down that you can hand to your kids that will help them in their property investment journey? I have.
I wish I knew at age 25 what I do now at age 45.
So I finally got around to writing that article, but you know what – it’s not a family secret and it’s worth sharing.
I’ve invested in lots of assets over the years. I’ve made good money and lost lots too (in shares FYI – never property!)
For me, successful property investing boils down to 9 key rules or golden nuggets, as I like to call them.
- Rule 1
- Rule 2
- Rule 3
- Rule 4
- Rule 5
- Rule 6
- Rule 7
- Rule 8
- Rule 9
Rule #1 – Pay the Right Price
This sounds simple – but in my opinion it’s not given enough consideration. The most successful property developers I know all say: You make your money when you buy the land.
That’s akin to saying “you make your money at the start of the project – by paying the right price”. This principle should apply to everyday property investors as well.
How many property investors know the complete sales history of all the units in a block of apartments before they buy the unit in that block? It’s pretty easy to find out these days – and you’re mad not too.
Websites like RP Data give you comparable values that were once only available to valuers, now they can be accessed by anyone, at a fairly reasonable price. So knowing the worth or comparable value is key.
Rule #2 – Infrastructure/Transport
Being ahead of the game in terms of future infrastructure can certainly put you ahead of the curve. There are many websites these days that focus on finding you the next area that may benefit from an ease in access to the city or increase in data speeds via the NBN etc.
Rule #3 – Add Value
Buying a property where you can add value has always been a pretty safe bet. Again, it’s a simple tip… but some of the best returns I see are clients who do a simple makeover to a property. New Kitchen from Ikea, new blinds, new carpet, new appliances and bingo after spending $25K their property has gone up $50k in value and the rent has increased to boot.
And here’s the kicker – on that $25k reno – Washington Brown will provide you with a depreciation schedule that allows you to legally write off half of it as an immediate tax deduction.
To get a free quote on your own property depreciation schedule, click here.
Rule #4 – Do the Opposite of Everyone Else
Now this is not a simple tip, but stay with me. I personally get nervous when all my friends (whom I haven’t heard from for 10 years) start ringing me up and asking me for property advice. It’s a sign the market is heating up. Be it shares or property, I hate following the crowd. But if you do trade shares – you will know that “the trend can be your friend”.
And that’s true….but things can turn quickly and that’s partly due to the media. Think about it – headlines sell papers. Examples.
Gloom: “Buyer Rides Property Wave: $200K profit in resale after 3 months.”
Doom: “Buyer Faces Bankruptcy: Bought apartment for $700K off the plans, forced to sell for $500 by settlement.”
That sells papers. This one doesn’t.
Average: “Buyer makes median rental yield and achieves steady capital growth.” BORING.
So in my view – be wary of the media and the general “spin”. Try to remain independent.
I don’t think Warren Buffet makes his decisions based upon what’s written in The New York Times – do you?
If you’re enjoying this article and want to find out how I’ve saved thousands of investors millions of dollars, take a look at my free book below!
Rule #5 – Follow the Leader
Now I know I’m about to contradict what I just said, but sometimes it pays to follow the leader – especially if they’re a knowledge one you respect with a proven track record.
On October 16th, 2008 – Warren Buffett wrote an article titled ‘Buy American, I Am’
If you followed his lead your stock portfolio would have increased by 212% – not bad!
From a property point of view, some of the wealthiest and most successful property developers I know are Lang Walker and Harry Triguboff.
If I followed their lead and bought in areas when they started developing there, I’d be far wealthier too. These guys have a gut feel for areas and employ rather smart people too.
Rule #6 – Have a Strategy
Have someone look at your current financial situation and your goals and work together to ensure a sound strategy is in place.
Here are two simple tips you might want to ask an advisor:
a. “How much are you making on this transaction?” Simple but effective and make them show you. How much is vested in their interest compared to yours?
b. “What is the best structure to buy this property in and why?” This should always be asked before any transaction. Depending on the phase of your life, it may be that a Self Managed Super Fund is the better alternative, in other circumstances it could be that owning a property personally will be of more benefit.
The decision making should also consider land tax, negative gearing and CGT implications. I can’t stress the importance of this more. Once you buy a property in a certain entity it’s pretty hard to change without ramifications/significant costs.
Getting a depreciation schedule could save you hundreds of thousands of dollars over the life of your property, so we think it’s pretty important! Work out how much you can claim on your property by using our free calculator.
Rule #7 – Do the Numbers
You should have a good understanding of the financial impact of any property transaction before you enter into it.
Do you know how stamp duty is treated in tax terms on your investment property?
How does claiming depreciation affect my capital gains tax when I sell it?
When I sell my property – how are the selling fees treated for CGT purposes?
These are tricky questions – but I reckon you should know this – before buying an investment property.
Rule #8 – Don’t Believe the HYPE
Property doesn’t always go up. That’s one of most often touted lies. Sure – if you’re not forced to sell in a downturn, then you can always hang on and claw your way back, but that isn’t the case for everyone.
The banks will lend you more on an off-the-plan property investment than they will on Woolworth or BHP Shares for instance.
So if you can gear into a property with a 5% deposit…remember – all it takes is for that property to go up 5% for you to double your money BUT if it goes down by 5% you LOSE all your money.
The above excludes all exit and entry costs… which is quite silly… but I’m making a point.
Sadly, this is where most investors don’t do the math.
Rule #9 – Buy the Land Free!
I review thousands and thousands of purchases every year. And when I see a client buying a property at close or below the original construction cost – I smile.
And it does happen. Post GFC we have released many reports where the original construction cost exceeded the purchase price paid by our client.
If you ask me – it’s very hard to lose money in property when you get the land free.
Yes it may take a while for that property or area to grow again. But eventually it will.
Personally, I’d rather buy at the low point of the market than when a market is surrounded by hype.
I want to pass this onto my daughter… but I’m keen to hear what you would add, so please leave a comment below.
Or if you’re looking for a depreciation schedule and wondering how much you could save on your tax bill, use our free calculator to find out!
Property Investment Tricks
These days I like to drop my daughter off to school as much as I can. I know soon enough she’ll be embarrassed of me – so better make hay whilst the sun shines right?
The other day as I was dropping her off, I looked across the road and noticed something strange.
I said to myself “wait a minute…I reckon those two blocks were the spitting image of each other in another life”.
So being the nosey real estate junky I am – I raced to work and did some research on RP Data and Google maps.
Sure enough, back in the day, these two blocks were pretty similar. But now the block on the left leaves its poor cousin for dead!
Being a Quantity Surveyor – I quickly did some maths – I reckon new balconies, render & paint for a block that size probably cost each owner around $65k.
But I’m thinking they’ll get a $120k more each in resale value.
That’s a pretty good return, but I’ll let you into a very little known trick that’ll make that return even better.
If the work carried out was paid for from the sinking fund…the total cost would have been 100% tax deductible.
So, if the body corporate had been increasing levies whilst the work was being planned – the investors in the block would have been able to claim the work as an outright deduction.
However, if the body corporate had to raise a special levy to do the work, most of the work would only be claimable at 2.5% per annum based upon the cost of the work.
That’s a MASSIVE difference to the bottom the line.
If you need a depreciation schedule – get a quote here.
Or work out how much you could claim on your property by using our free calculator.