April 2012 - Buy Hold & Hope...Seven Myths That Destroy Your Wealth
By Rich Harvey, Managing Director propertybuyer
Welcome to your April propertybuyer market update.
In this edition we will look at;
- Buy, Hold & Hope...Seven myths that destroy your wealth
- Client stories
- Webinar - How to buy positive cash flow property
1. Buy Hold & Hope...Seven Myths That Destroy Your Wealth
You make your money when you buy...but your make more money when you pro-actively review andmanage what you have bought! Some investors adopt a "set and forget" type mentality to property investing. This is a dangerous strategy as there are many things that can chance over time and affect the performance of your investment. To both minimise risk and to accelerate growth of your property portfolio it is critical that you take an active interest and involvement of each property you hold.
Let's examine seven myths that some investors and home buyers may unconsciously believe and what you can do to improve your portfolio:
1. Property prices will always rise
As an investor or home buyer it's important to remember that the value of property does not always rise. The key drivers for property prices include buyer sentiment, the availability of credit, employment rates and broader economic conditions, have a significant impact on what your property might sell for at auction next weekend! While trying to pick the best time to invest is a clever way to make money, what you buy is even more important. This is because good quality properties will always trade at a premium - even in down markets.
I would rather have a high quality property in my portfolio that I know will be in demand (i.e. saleable during any market conditions) then have a bargain property that can only be sold during a rising market. So the tip here is...understand that property prices (and rents) do fluctuate and don't panic when they correct. Focus on buying top quality properties in suburbs that have history of growth and the right elements for future demand! And use investment strategies that don't rely solely on capital growth.
2. Negative gearing is dead
Negative gearing for its own sake is not a smart strategy. Negative gearing is where the loss made from a property investment is off-set against an investors' income. However, where negative gearing is a by-product of choosing top quality investment property in a high growth location, it is a solid strategy that works for many investors. For negative gearing to work effectively, the rate of capital growth must exceed the holding costs of the property and you also need the cash buffer (and a high income) to cover the shortfall. It's highly unlikely the Federal Government will abolish the tax concessions on residential investment property, because they know it is far cheaper for private investors to help bridge the supply shortfall in property than to build more public housing.
There is a limit to the number of negatively geared properties that you own because eventually you run out of both tax deductions and cash flow (to find the shortfall). The trick for investors is building a portfolio of properties that become self-sustaining with a good mix of high growth properties and positive cash flow properties.
3. My property manager is doing a good job
We often believe that no news is good news. Never assume your property manager has everything under control. In reality, things in properties do break and wear out. During the rainy summer months walls and cupboards grow mould. Hot water systems burn out and dishwashers may give up the ghost (all this and more happened to me in the last 12 months)! Your property manager should be conducting regular inspections and provide you with a written report and photos at least twice a year. They should be advising you at least 3 months before the expiry of the lease if the rent should be increased. And they should provide you with a clear financial summary of rent collected and expenses paid at the end of the financial year.
4. Houses perform better than units
Some investors blindly hold to the mantra that houses appreciate faster than units due to higher land content. However, property price growth is highly correlated to "position". Home buyers and investors alike will pay more for a property that is located close to work and lifestyle attractions. For example, the 10 acre farm at Kurrajong with the nice farm house for $1.5m is not likely to perform nearly as well as the two $750,000 terraces in the inner west close to the train line with renovation potential. Proximity to the CBD, transports nodes, employment hubs and other amenities will be the strongest factors for price growth. While land is a scarce commodity, well built apartments in sought after locations can outperform houses. This is more likely to be the norm in the future as "affordability" drives the property market. There is likely to be more demand for affordable apartments in the inner and middle ring suburbs than for houses (which may be two to three times the median price of apartments).
5. Just buy, hold and wait for growth
This market in 2012 is challenging. You can no longer just buy, hold and hope! Capital growth is no longer assured. You have to be strategic about what and where you buy.You must have a plan.With a sideways moving market you have to create the opportunities for growth and cash flow.
Three ways to make instant equity include:
1. Buying below market value
2. Buying in hot spots, and
3. Adding value
Buying below market value requires extensive market research and monitoring of individual properties over a sustained time period. You have to identify a motivated vendor that wants to sell quickly due to job loss, death, divorce or mortgage stress. Then comes the negotiation phase, knowing recent comparable sales, completing due diligence and exchanging quickly.Buying in hot spots is another way to tap into growth vein. Did you know there's over 15,000 suburbs Australia-wide and 650 suburbs in Greater Sydney area alone? It's easy to get "options anxiety" when doing research. Don't rely on desktop research alone - you have to wear out some shoe leather to ground truth your findings. Finding high capital growth and positive cash flow is getting harder.
Here are my quick tips on how to find hotspots:
Look for PIE areas (Population, Infrastructure, Employment). Buy in areas with:
* Rising population
* Expanding in infrastructure, and
* Diverse employment opportunities
The other trick to create equity is to buy properties and add value via a renovation, subdivision or adding a granny flat. By adding value you create instant equity that you can then use to fund more investment activity or create a cash buffer for any shortfalls.
6. The banks are on my side
Banks are there to make profits for shareholders...not to pay off your home loan earlier. Honeymoon rates are just the marketing plug so you'll take up their loan offering. Be fully aware of the fees and charges that the banks are proposing. Don't just focus on the interest rate for a loan - look at the features and flexibility of the loan. It's critical to have a sound financial strategy around the investment purchase. My tip is to get a savvy mortgage broker on your side - they know what it takes to get your loan application approved, and should have sophisticated software to work out which loan suits your personal situation. They can compare loan products and maximise your borrowing capacity at lower cost. We are happy to recommend the top finance brokers around. The other tip is to regularly compare your rates and don't be afraid to refinance to get a better deal.
7. Doing things myself (DIY) is best
The smart investor has usually worked out the power of leverage in using other peoples skills, time and energy. While you can theoretically do everything yourself, it doesn't make financial sense. You can multiply your time by tapping into a network of professionals that can do things much more efficiently than you. My tip here is to get the right team of people to help you strategise, research, appraise and negotiate. You'll need experts in finance, legals, property management, depreciated, tax accounting, structures, building inspections, renovations and more. Please contact us if you want a referral to reputable professionals.
Don't just buy and hope you've made a good investment decision. Move from "hope" to "reality" in your mindset and monitor the performance of your property portfolio at least annually. There may come a time that you will have to sell the under-performing property. Take care of your portfolio now, and your portfolio will take care of you when you're older!
2. Client Stories
Here is a selection of feedback from some of our happy clients last month:
Buyer type: Local Investor
Buyer's brief: Good apartment within walking distance to train - happy to do minor renovations
Asking Price: Auction: Bidding from $700K +
Saving: $25,000 based on appraisal
Buyer's Agent Comment
Scott & Deb are both high ranking offices in the Australian Armed Forces and wanted to buy their first investment property. They were ideally looking for something in which they could add some value. After a couple of months, I located a fantastic 3 bedroom apartment, just 400m from the train station - and just 10 minutes into the heart of the city. With an excellent floor-plan, an ideal L-shaped lounge/dining, north-facing balcony and lock-up garage, it had everything you would seek in an investment property. The property needed new carpet, pain and some blinds which we organised for them, on the day after settlement. The property was actually leased for $690pw before the first open.
What our clients say:
"Clone" Matt! He was fantastic and made the whole experience very painless and relatively enjoyable. He mentored us through the entire process and was very patient. Our experience with propertybuyer was first rate. Our agent Matt Corbett, was extremely professional, patient and was a great sounding board for what was such an important purchase for Deb and I. Matt was always available to provide very safe advice and quickly understood what we were after. He guided us through the negotiations and this resulted in purchasing a fantastic investment property at a good price in a great location. I would not hesitate in recommending propertybuyer to any of our friends and have already given Matt's details to my boss who will be calling him.
Scott & Deb
3.Webinar - How to buy a positive cash flow property
WATCH THIS SPACE!
Positive Cash Flow Webinar invite, coming to your inbox soon!
Presented by Rich Harvey, CEO propertybuyer and Stewart Fraser,
Positive Cash Flow Specialist
We'll show you how the figures stack up and, using our clever granny flat strategy how to buy properties for under $350,000 in Sydney returning yields of 9% to 10% +.
PLUS, there will be a special & exclusive invite to those who want to learn how to buy positive cash flow property, like a pro...watch this space!