A poor purchase may result in little or no capital growth or rental income for months at a time, thereby leaving the property investor out of pocket. It’s important to know the medium house price, capital growth rates and rental yields of your area if you are going to buy well – you must do your research. A purchase that will provide a capital growth of 7 – 10% and yields of about 5% is the key for investors that want to build long-term wealth.

Here are 10 points that will help you achieve high capital growth and yields in your own property investments.

1. Do Your Research.

Look at as many properties as possible to get an idea about prices in your area, what adds value, which types appreciate faster, how to get a good deal (getting properties at much lower than market value) and what are the pitfalls of a too-good-to-be-true deal.

2. Get the property valued before you buy.

 Even if you’ve viewed 100 properties in an area and checked what they sold for, their relative sizes and their aspects, buyers can still pay overinflated prices for properties. I’ve seen literally thousands of properties in my area over the last decade and I still pay for an independent valuation every time I buy. It ensures that I never overpay for a property and that I haven’t accidentally missed something.

3. Get the property valued before you renovate.

 One of the biggest misconceptions investors have is that the more capital they spent on a property, the more profit they will make. This isn’t always the case. A valuer can tell you what your home is worth now, what it will be worth after, and whether your $30,000 kitchen renovation will actually add $30,000 to your home’s value.

4. Get a good property manager.

Having a good property manager is the best way to maximize your rental income and to ensure that it rises with the market. Most self-managed properties are under-rented as owners are often terrified about upsetting the tenant and then having a vacant property. Not only will a good property manger maximise your rental but he’ll also get onto any arrears a lot quicker and will inspect your property to see that it’s well maintained.  

5. Location, Location, Location.

 Look for areas with potential for high growth and yields. Important things to look for are proximity to public transport, leisure activities (parks, beaches and lakes) and proximity to work and schools. Pay for some independent research which will tell you what the highest-rated suburbs are. The better performing suburbs are often the best suburbs from decade to decade.

6. Buy “better” properties.

Physical factors to look for when researching properties are good-sized bedrooms, off-street parking, good positioning and a uniqueness that sets the property apart from others in the street. These will ensure the property grows in value and desirability. On top of that, if the property is median-priced most of the population can afford to buy or rent it, which means it will rarely be vacant and will sell fast if need be.

7. Buy blue chip.

Cheap properties are often cheap because they are not in great demand and there’s plenty to choose from. It’s often worth paying market value for a better property in a top suburb than it is to get a discount for something that no one else really wants. Blue chip will mean different things in different areas and so that could mean two-bedroom units in some and four-bedroom houses in others.

8. Buy at, or below, market value.

There are ways to acquire good properties below market price.  In a flatter market, for instance, clearance rates are around 50%, making properties harder to sell. Here, buyers have greater bargaining power. Unrenovated properties in good areas can fetch lower prices and provide good yields post-renovation. Another is buying an emergency sale when vendors are hard-pressed to sell to finance a recent buy or relocation.

9. Get a good mortgage broker.

As an investor that’s trying to build a portfolio as fast as possible, a good broker is one of the most important professionals on my team. If I can borrow 80% of a property’s value rather than 70%, it means my limited deposits go 50% further as I only need to put 20% down rather than 30%. It’s not always about getting the cheapest rate and the more legwork the broker does for me the more time I can spend finding a better property. 

10. Stick to your strategy. 

Every investor requires their own strategy, as circumstances vary and everyone is risk adverse to a different level. Work out what works for you. Once you find the strategy, stick to it. You need to be aware of other opportunities and get other advice, but often these can be distractions. A good strategy doesn’t have to be complicated – it’s often the simple things that work. My own strategy is to buy and hold as to sell and re-buy takes most of your profits. The technique I use is to refinance my property yearly where possible and use part of the cash to cashflow my properties and part as deposits on costs on further properties to keep my portfolio growing.

(By Empire chief executive Chris Gray)

HIA Chief Economist, Dr Harley Dale said that building approvals levels currently implied around 145,000 housing starts per year, well short of the new homes required to meet Australia’s rapidly growing population.

“It is encouraging to see signs of a new home building recovery, but then after five years of trend decline in residential construction you would certainly hope to be seeing some evidence of a turnaround.

“We are, however, looking at a moderate rather than strong lift in new home building in 2010. This disappointing outlook will remain in play until such time as credit constraints on medium and high density developments are eased and until supply side obstacles including inequitable taxation of new housing and re-emerging land supply shortages are effectively tackled.

“In the meantime an acute shortage of new housing stock will persist, generating undue pressure on rents and on existing home values,” said Harley Dale.

Total seasonally adjusted building approvals eased by 0.7 per cent in the month of October, driven by a 17.9 per cent drop in multi-unit approvals. Detached house approvals increased by 5.7 per cent following an upwardly revised 1.1 per cent gain in September.

Building approvals increased in three states and fell in three states in October.

The number of seasonally adjusted residential dwelling approvals increased in October by 10.5 per cent in Tasmania, 9.7 per cent in Western Australia, and 4.2 per cent in Queensland. Approvals dropped by 10.2 per cent in New South Wales and were down by 4.5 per cent in South Australia and 0.3 per cent in Victoria. The trend number of approvals increased by 2 per cent in the Northern Territory and by 1 per cent in the Australian Capital Territory.

(taken from www.hia.com.au)

The point the journalist was trying to explain was that if you have a house & it goes up in value; you’re really no better off. This theory has been thrown around by both property skeptics and property lovers (like Dolf Deroos) for many years, and if I take the skeptics side for just a moment, I agree that if you had a house worth $400,000 and it increased to $500,000 within any timeframe, then logic suggests that if you sell to upgrade, you’ll need to spend say $600,000 for the house that was worth $500,000 back when you bought your last purchase (for $400,000).  So the real loser in this instance is the renter who is forced to enter the market at a higher price.

BUT, the true winner is he or she who has multiple properties, the astute property investor.

Let’s say you had 4 properties (3 rentals & 1 you live in) and you paid $400,000 per property on the same day. Now let’s say the Reserve Bank is right (and we hope they are) and the price increases in the next 2 years to $500,000. Now we’ve just had an increase of $400,000 (4 x $100,000) and yes, if we were to sell the home we live in, replacement value would be $500,000, but if we sold the other 3 because we want to cash up our investments, we’ve just pocketed $100,000 per property (less any expenses – this is a very simplistic and hypothetical explanation for illustration purposes).

So if this is the case, it shows that there is a loser, a status quo and a winner in this circumstance. It’s not a secret, never has been, but you invariably will be in one of these 3 categories. My old boss told me a saying many years ago “The difference between a rort and a perk is that a rort is just a perk you’re not in on!”

There’s many things to learn along the journey of multiple property ownership one of the most important is to realise than investing in property is a journey not just an event or series of events (one of the many things we do and teach as part of our property sourcing model through our property coaches and support evenings), so choose to be the right person in this story.

The last point in the report on the radio by the journalist said this “there is one group of people who are going to gain from this, landlords [aka the person with 4 properties], but unfortunately usually it’s the wealthy upperclassman who have investment properties so we now see a divide between the upper and lower class.” Last point, if you do research (which the RBA has) you’ll find the majority of investment property owners are ‘middle class’ at best, average Australians not the elitists, but more on this in  another blog. Opportunity knocks, the time is now.

 Now maybe we’re missing something here (or put more bluntly, what a load of rubbish!), so let’s try to put this into perspective. Is it reasonable to expect that if you buy a property from this company for say $400,000 we should accept the property will most likely be between $20,000 and $28,000 below bank valuation and that if you’re not accepting of this point, you’ve not really passed the “pre-qualifying” test? So, what happens if the property is valued and it comes in say $35,000 below value? Well I guess you’ve already accepted $28,000 so what another $7,000?

 If you read down the “test” you will found there is another intriguing point that says something like this, “Do you understand that a pre approval for an ‘off the plan’ purchase is only a conditional approval and that if there’s a valuation short fall on completion that you are ‘on your own’?” (or words to that effect). Now that’s true about the conditional loan point for an off the plan purchase but there’s plenty of people that went belly up a few years ago when all the docklands properties in Victoria settled for this very reason. There was more of an overselling of the properties at inflated prices than there was a drop in valuation. Of course, this led to people panicking as the settlement date got close and then they sold for ‘fire sale prices’ and then of course the Valuers have to take this into consideration.

 So back to the point, should the bank’s valuation be accepted as realistic? Well, if a valuation comes in below the purchase price, it certainly should at least send alarm bells to do a whole lot more digging. Over the years, we’ve seen valuations that have been unfair and we’ve tried to challenge the Valuers at times with clear evidence and that doesn’t always work. However as we’ve always done (and will continue to do)  if a property doesn’t value up then the person buying the property should be given clear evidence as to why the Valuer was perhaps a little off and then the customer should have every right to walk away from the property without a salesperson crawling all over them.

 Now, we actually haven’t had this issue at all on any properties we’ve sold since we’ve taken the sourcing of properties into our own hands (Jan 2009) and we’re prepared to tackle this issue front on, hence what we’re writing about. Most property businesses selling “investment properties” shy away from this discussion; ask them for their policy on valuation short falls!

 One of our convictions is that if a valuation falls short on any property, we notify the customer, with evidence if we disagree (which usually we would because we don’t source properties where this stuff consistently happens – but we can be wrong so it would certainly ring alarm bells for us too) and understand fully if the customer chooses not to proceed, again this has not happen to us yet. We wish we could speak on behalf of others, but we can’t – the key point here though is pretty simple, don’t listen to that type of rubbish.

 If you’re using another property to secure a purchase (the term here is cross securitizing your properties) where the business selling the property are pre-warning you about valuations (usually because people place ridiculous margins on top of their properties), you’d better be prepared for the fact that you may never know how the property valued up because the banks accepted the overall security and you just bought something that could have been  over priced … a simple strategy many property sales businesses use.

 Always ask for the valuation confirmation from the sales company you’re dealing with, and if they say banks won’t give them the valuation (which at times is correct), ask them to place in writing to you that the valuation for the property you bought was at or above the contract price, and then store that written confirmation, just in case.

Firstly, its important to understand what impact the FHOG had on the market since it was introduced. The FHOG was introduced to provide stimulus to the housing market to maintain confidence in the face of the GFC but all the positive press would leave many people surprised to find out that only 66,000 people have taken advantage of the grant. When you look at this compared to a shortfall of 180,000 properties across the country, its easy to see why rental properties still remain in undersupply. In fact, with ‘market balance’ being a 3% vacancy rate, many markets around Australia remain below 2% (with the worst below 1.5%) thus highlighting the limited impact of FHOG on reducing the demand for rentals as people moved out of the rental market and into home ownership.

When the FHOG comes to an end on September 30th, what we are still left with is a sizeable undersupply and that’s where the opportunities lie for a keen investor. To further clear the ‘fog’, let’s look at the property investment market. Interest rates are at historical lows but are likely to rise in 2010 (maybe even by December) but are likely to remain lower than the highs of the last two years. Note: we’re currently recommending our clients factor in a 1.5% rise over the next 18 months to be on the safe side when doing their projections.

With the low cost of funds and pent up demand in both property availability (a driver of capital growth) and rental availability (a driver of improving rents and lower vacancy) coupled with FHOG buyers leaving the market, what now presents itself is a unique opportunity for property investors. That said, we suggest you should ideally avoid the ‘first home owner’ favoured areas anyway as we could see some mortgage stress there as rates rise, potentially having a negative impact on returns and capital growth.

So given the current climate, property investors can, with the right knowledge, secure quality opportunities of cash flow positive (or close to) properties in high growth areas. In the words of John Edwards (CEO of Residex) this week ‘ … based on what I see, there is likely to be a short period of growth followed by increasing rental yields. This presents a unique positive investment environment where immediate equity build up is possible and positive gearing will result in a relatively short time frame. If I am incorrect then we effectively have had a bet both ways as properties will simply grow in value until the new unaffordability level is reached. If we are selective in the areas where we invest then even if interest rate increases cause problems then we will be insulated to a large extent’

So, all that you need to clear the ‘fog’ is quality education, sound research and opportunity … what are you waiting for?!

Why are so many non residents investing in Australia?

It surprised us this week when we did some research on our current clients and where they come from. It turns out that around 20% originate from overseas. So, what is it they that they see in our market that the rest of us might be missing?

Why are so many non residents investing in Australia?

Their reasons for investing are the strong fundamentals that underpin the Australian residential property market:

• Demand or the significant undersupply of rental property in many areas.
• Awareness of the desirability of Australia as a place to live… either as ‘expats’ or word of mouth from countries where there is strong migration to Australia
• Understanding of high levels of migration and organic growth placing further pressure on demand
• Low new home construction rates, low availability of land and high development costs constraining supply
• Strong prospects and forecasts of capital growth now widely discussed in our media
• Strong rental demand and low vacancy rates
• Relatively low borrowing costs
• Stable political climate and economy
• Simple foreign investment requirements (see FIRB section)

Sometimes, as locals, it’s easy to be complacent about the opportune time we find ourselves enjoying here in Australia and indeed, have enjoyed historically. Maybe it’s a reflection of their previous life experiences in other countries that leads migrants to view the opportunities on offer here in Australia as bargains?. More importantly, I guess the biggest lesson we can all take from this is, like most things in life, it’s how you look at any situation that dictates whether you see the glass half full or half empty!

So, assuming we’d all like our glasses half full (and as an investor for the long term, who wouldn’t?), where should we start looking to uncover those deals? We’ve also done a lot of research on that over the last few months as the market has changed and they’re not always where you’d expect. Like a recent duplex opportunity on the Sunshine Coast (where some reports claim it’s one of most ‘unaffordable markets in Australia’ yet others have one of the suburbs in the top 10 ‘most affordable’!) a buyer was able to secure land and build at around $635,000. The project came in under valuation and there are similar duplex already being marketed at $400,000 a side ($800,000 for the two) and rents for this type of property around achieving the $380 per week mark (around $760 per week for both). Even if this duplex doesn’t achieve the same resale or rents, the price or rent would have to come a long way back before this deal looks anything less than ‘great’.

It doesn’t even need to be something ‘special’ like a duplex. Another buyer was able to secure a block in the final stage of an estate for $40,000 below what other similar sized blocks had sold in that estate. With the right build, that property is now virtually cash flow neutral for them and in what is predicted to be a high capital growth area. More than 20 ‘sale’ blocks were sold in one weekend. These buyers were ready and seized an opportunity while others debated the virtues of buying in the end of an estate.

There’s some great opportunities out there and maybe all it takes to find them is a small change of mindset… happy hunting!

What value do you place on education? It would seem that education in the property sector is priced at several thousand ‘pennies’ – is it worth it?

I sat with a client recently to review their Strategy. Normally we look at this first, however with this particular client they came to us based on an opportunity that is allowing them to build ‘below valuation’. It’s always interesting to hear the journey people take when property investing and for this couple it is a common story with lessons for all of us.

Theirs is one of ‘running out of time’. With 10 years left of work they understand that their Super wont be enough to support their modest lifestyle. With an understanding that property is ‘just easier’ than other asset classes they set about gaining the education they needed to grow their portfolio to release them into a worry free retirement. It soon became apparent to this couple that most ‘educators’ were saying pretty much the same thing and struggled to come to the terms with the fees charged (whether as an ‘upfront fee’ or as a percentage of a property purchase, etc). So they set about building their portfolio.

To their credit it was a sound plan and the initial steps had them on track to achieve their 5 year goals. While there is much they still don’t know, we are now working with them on the journey from just ‘investing in property’ to understanding the ‘business of property investing’. We’re teaching them how the overall portfolio ‘works’ and getting them some good accounting advice to ensure they take into account the areas that the previous ‘educators’ failed to mention (implications of gearing on Capital Gains Tax, diminishing effect of negative gearing, GST implications if sold within a certain timeframe, benefits of correct structures, etc) plus looking in detail at the type of property, location based on research not the ‘educators’ stock availability, and much more.

This couple are now on track to achieve their 5 year goal in just two years and their retirement just might come sooner and be more comfortable than they had imagined. By the way, what the other ‘educators’ were offering for thousands of dollars, we provide for free. Why, because property investing is a journey, not an event and we want to partner on that journey with them. We agree on the ‘value’ of education, just not the ‘cost’ placed on it by some.

For them, our services are free and they were able to access a property through us that fits their Strategy that came in below valuation: and we do all the work! Now that’s value for money – maybe we can help you too?

Isn’t it fascinating that only weeks ago the media reporting on the property market was all doom and gloom and now it’s all zoom and boom. But where are we really and what’s going to happen in the next couple of years? More importantly what does that mean for you?

In the last few days we’ve seen a stern caution by the RBA on an impending housing bubble if we fail to add more dwellings to increase supply and avoid a run up in prices. The reality is the circumstances for upward pressure are already in place.

Focusing on the SE QLD market, we struggle to see how housing will become more affordable in the short and medium term than it is now. Already in undersupply and with approximately 750,000 new people making home in SEQ by 2031 we believe the SEQ Regional Plan is fundamentally flawed in forecasting more than 50% of that growth to be housed in infill developments (medium and high density). While we can ‘hope’ (and hope is not a strategy) that there will be an increasing desire for people to actually want this type of accommodation (not just forced to by price point), there are great challenges in delivering the required volume given the associated upfront infrastructure costs, site availability, assessment and approval delays and other regulatory costs.

Likewise the cost of new land, the charges imposed by State and Local Governments and the limited supply of englobo land that can actually be delivered to the public (which we believe is significantly less than what the Government has indicated in their ‘broadhectre land study’) significantly constrain supply.

While the media was promoting the doom and gloom, the underlying fundamentals have continued to provide upward pressure on prices as shown in the latest reporting (such as the House Price Index – on which we will have more to say later). It would appear that the media has finally caught onto what most of the industry experts have been saying for some time.

So what does this mean for you? Is now the right time to invest in property? Should you buy and hold, build, flip … what is best?

We believe you should discuss the short, medium and long term prospects of the market in light of what you want to achieve in the long term and develop a Strategy that is appropriate for YOU. A ‘property coach’ is a great place to start – and that’s what we do.

Contact us to see how we can help