Investment Property Australia Guide


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A guide to Investment Property in Australia from

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Investment Property Australia Guide

  1. 1. 3 Introduction Dear Investor, Invest My Way is a fully independent investment property platform designed by property investors, for property investors, empowering them to make better investing decisions. Through the eBooks, Knowledge Base article library and suburb reports available on the website, Invest My Way aims to assist investors to cover off on the essential steps that must be followed in order to get finances ready, establish a budget, devise a strategy, select the right property and complete adequate due diligence. We wish you the very best of luck with your investing. Yours sincerely, Invest My Way Disclaimer: The information contained herein does not suggest or imply, and should not be construed in any manner, a guarantee of future performance and/or investment advice. Professional advice is always recommended prior to making any investment decisions.
  2. 2. 2 If you ask your local real estate agent about property prices, they will most likely say that they double every 7-10 years. However, the reality on average is that prices have only doubled every 15 years, since 1880 and only every 11 years, since 1955. There is much to ponder about the constantly changing world of property investing but the most important question (and one that is rarely asked) is this: how long will future property cycles be? Most key experts agree that macroeconomic conditions will now lend themselves to property cycles becoming longer and this is the reason why it is more important than ever to be educated and well informed about the rules of successful property investing. To illustrate this further, let us look into the current doubling cycle in Sydney. In 2002, the median price was $452,000. In 2013, 11 years later, the median price is approximately $660,000. Even if prices in Sydney grew at 10% per annum for the next 4 years, it is still going to take 15 years for this doubling cycle to complete. So what does this mean for the modern day property investor? Yield will become as important as growth in the overall investment decision. Negative gearing will only be an effective strategy if you time the market correctly Average decisions and average advice will get below average results. You may be wondering at this point: is there still money to be made in residential property? Absolutely!!! However, dumb luck is not going to get you through. You have to be smarter than before to achieve similar results as we have seen in the past. But let us be honest. None of us want just OK results! We all want to achieve better than before. Given that, how do we outperform the past and grow a profitable and meaningful property portfolio? What we have to offer you is a list of what we believe are 5 keys to achieving success in the modern day property market. Introductory eBookThe 5 pillars of successful property investing
  3. 3. ! 17 Pillar 1: Timing the Cycle Purchase during the value cycle of the market, otherwise known as 6 o’clock on the investment clock. The value cycle generally has a combination of the below characteristics: • Poor growth performance over extended period • Rising Rents • Under supply of property • Low vacancy rates • Strong yields • Low un-employment • Recent improvements in suburb amenities Some so called “advisors” will use past results as an indication of future performance, you have to be careful with this, as strong past performance can be followed by a market correction. Recommendation: If you don’t know the current stage of the cycle you are in, you need to get professional advice. If you can’t afford the consultation fees involved, then start by looking at the reports on our website: Here you will be directed to markets that are showing value. Don’t rely on mainstream media to arrive at an opinion about where the current property cycle is at. In most cases, it will be the exact opposite. Warning: If you happen to purchase an investment property at the wrong time of the cycle, you need to accept that losses are possible and frankly, common. Remember that negative gearing is only a good strategy if the property is rising in value. Pillar 2: Understand the Cash Flow Purchase a property that has a strong chance of being occupied (tenanted) for 52 weeks each year. Don’t purchase in a location where there is a real risk of the property not being occupied for more than 4-6 weeks. This is very common in mining towns or remote regional towns. Always stick major populated centres. Not only that, stay close to places where there is strong diversification of industry and low unemployment. Recommendation: A smart investor will always base the purchase price on the potential income (rent returns) of the property. Always speak to two local property managers to get a feel of the income that a property can generate. You can find referrals to quality property managers on our website: Introductory eBookThe 5 pillars of successful property investing
  4. 4. ! 17 Warning: With mining towns, remember the 4:1 ratio: it takes four to build a mine and one to manage it. This means the “demand” in these suburbs may reduce once the mine construction is over. That can have serious negative effects on your property rent and value. Pillar 3: Don’t Pay Too Much Paying too much will limit capital growth. If you don’t know what a property is worth, find out! Don’t rely solely on real estate agents as it is their job to get the highest possible price for their client, which is the vendor. Recommendation: Get a valuation report off our website: You can also spend four to six weeks inspecting properties and collating comparable sales to get the real value of properties for sale in a particular area. Warning: Paying too much will affect the growth and also the annual return of the investment. Pillar 4: Location, Location, Location Location is key to the potential profit (and losses) in your investment but it has to be balanced with the other 3 pillars mentioned above. The location will ensure stable cash flow and will underwrite the buyer on re-sale. However, property investing is not as simple as choosing a great location and paying any price for it. The term location, location, location has provided novice investors with a false sense of security. Double bay in Sydney is a prime example. It is one of the best locations in Australia and in 2012, you could buy a property cheaper than its selling price in 2004. Capital growth actually decreased on some properties after 8 years. Location is important but it carries equal weighting with the timing of the cycle, understanding cash flow and paying a fair price. It is important to remember that its not the location but the economic and demographic changes in that location that will drag the property price up or down. Recommendation: The simplest way to identify a quality location is to check the walkscore rating on our website: Warning: Avoid buying a property next to establishments that can dramatically affect its cash flow or emotional appeal (unless there is a compelling reason). These include main roads, service stations, industrial uses and/or commission housing. Introductory eBookThe 5 pillars of successful property investing
  5. 5. ! 17 Pillar 5: Property What others perceive as the linchpin in property investment should actually be the least of your concerns. It’s important to understand that the specific asset selection (the property) only plays a small part in ensuring the overall success of the property investment – unless of course you are a property developer. With passive investment, the property itself is a secondary consideration. Experienced investors know that some of the “ugliest” properties, purchased using your calculator can provide the best returns. As previously mentioned, properties move in value because demographic and economic changes drag them from value A to value B. Properties do not appreciate in value because you have an emotional connection with them. This is in fact, the number one reason why people fail. If you fall in love with a property, all sound economic theory can go out the window. Recommendation: Judge a property like you judge your shares: by the numbers and potential. There are many statistics on our website that will help you with making a more informed decision about property investing. Warning: Investors who buy with their heart instead of their head have a higher chance of failing. Not every transaction is the same but as long as you try to meet the criteria mentioned above in the best possible way, you have a high chance of achieving success. We sincerely hope that you will find the information, tools and research reports on useful. We wish you the best of luck! The Invest My Way team. Introductory eBookThe 5 pillars of successful property investing