Property Investment Guide
1. Overview
Why get involved in property investment?
Real estate investment is the purchase of a future income stream from property, and it offers several advantages over other investments, including potentially higher returns, stability, inflation hedging, and diversification.
Real estate investment has proven above-average returns compared to many other asset classes in Australia, and historical data can back it up. Australia has enjoyed a strong annual growth rate in investment property, and the future demand is also a given, this is all thanks to the increasing population and declining household size.
The demand with properties will continue to prop up real estate prices; at the same time, the changing demographics will ensure a steady stream of tenants.
The Australian government also offers generous tax advantages through negative gearing. Many average Australians and high-income earners use this to reduce their taxable income.
So, why choose investment property instead of other asset classes?
One of the advantages of investing in residential real estate is non-investors (homeowners) dominating the market, who don't think like investors. This is the main reason why there’s relative stability to residential real estate prices.
Stock/shares investment may yield attractive long-term returns, but it can be more volatile and unpredictable than the property market. Therefore, it doesn't sit well for low-risk takers, especially those who have no idea how the share market works.
Deposit savings accounts are a low-risk investment, but it also yields minimal rewards.
What are the 5 ways you make money through property investment?
You can benefit from real estate investment in one or more of the 5 ways below, especially if you get the combination right.
Capital Growth: are those sound assets based on your properties that appreciate in value at wealth-building rates.
Cash Flow: In other words, your rent.
Tax benefits: Good tax strategy can help you manage your cash flow, decrease your tax obligations and increase your bottom line.
Accelerated Growth: purchasing a property that needs a bit of cosmetic TLC through renovations or a major facelift through property development
Leverage: Utilising finance strategically to help you purchase more property more frequently.
What are the Pros and Cons of Investment Property?
Compared to other forms, property investing is relatively safe and proven for growing wealth.
Pros:
Strong historical performance: Shares were the only asset class over the past 20 years that have outperformed all investment types, including residential properties.
Control: you can manage your assets rather than leaving the decisions to a large corporation or fund manager. You can improve your property that will give you quick capital growth.
Tax advantages: investment properties offer tax advantages, including depreciation and the possibility of negative gearing if it is appropriate for you.
Security: Properties don't "go broke" as companies or shares do. The size of the residential market and the fact that under 70% of the people that own properties are owner-occupiers makes this possible.
Leverage: The rental you receive from your property allows you to borrow and even get the leverage by paying a portion of the interest on your mortgage.
Insurable: Not just building insurance, but smart investors take out landlords insurance to protect their interests.
Cons:
Property investments are not all sunshine and roses. There are some negatives associated with real estate investing.
High entry costs: Property prices are constantly on the rise because of its demand, making it harder to get into the market. This high entry cost keeps the majority of new investors out.
Lack of diversification: the high entry cost is common for beginning investors to force them to have all their eggs in one basket. The lack of diversification is a risk if the market changes suddenly or your investment doesn't provide the returns you're expecting.
Ongoing and additional costs: there’s an ongoing list of expenses like insurance, mortgage, maintenance, renovation, and so much more. These may be regular or may come as a surprise when you least expect it.
Tenant Problems: Even if you've hired the best property managers to look after your property, you can still have to deal with tenant problems or rental vacancy. If you do not have cash buffer or landlord insurance, this can put a dent into your finances.
Property is illiquid and lumpy: Selling your property may take time, and you have to sell the entire property when you need the money.
Surprises: Changing interest rates can take a creep up on investors.
When starting out investing in real estate, it's important to understand the three stages of building wealth through the property from the get-go, which are:
Accumulation Phase: This stage is where you'll build your portfolio of high growth "investment grade" properties; usually, it is about over a 10 – 15 year period.
Consolidation Phase: This stage involves reducing the debt on your properties, which conversely increases their cash flow when you need it the most.
Lifestyle Phase: This stage is all about enjoying your life living off the cash machine you have produced in the first 3 phases.
Book a free no-obligation call with us to know how we can help you map out your Investment Journey with a financing plan to suit your lifestyle needs as well
Cash flow or capital growth – which is better?
With real estate investment, you'll often hear two somewhat conflicting philosophies being bandied around.
Cash Flow - these are the rental returns that are higher than your outgoings which also include mortgage payments, leaving money in your pocket each month.
Capital Growth - this is the favoured strategy to invest for capital growth over cash flow. You need to buy a property that produces above-average increases in value long term.
The lower rental returns in Australia's property investment means higher capital growth.
An investment property that is cash flow positive one day maybe cash flow negative the next in a rising interest rate environment.
Knowing how to invest in property can enable both high returns (cash flow) and capital growth by innovating or developing your high growth properties.
What are the other types of property investments?
There are several property investment types in the Australian market that you can choose from as an investor.
Freestanding house serves as a great home for tenants looking to raise a family. These are ideal for moderate-sized families, located in the right suburb that is pet-friendly and with a fenced backyard. Often these types of property commands a high price in the rental market and delivers consistent capital growth because of its strong demand by owner-occupiers.
Apartments are the best suited to people with busy lifestyles. Location is the most important aspect of these properties, as tenants prefer a place that is accessible to everything they need.
Holiday homes make relatively poorer investments as they are typically in seasonal demand and may remain untenanted for long periods of time. and their values also tend to fluctuate considerably depending upon the general economic cycle.
Townhouses – are an increasingly popular style of accommodation for a wide demographic.
Villas – these can be great investments because they are essentially "landed properties."
Blocks of apartments – there are very few of these in the market, but it can be a good investment for those with deep pockets.
Student accommodation and serviced apartments – we can't see evidence of these making a sound return.
Commercial and Industrial real estate – is a sound investment for sophisticated investors who already own a substantial residential property portfolio. Learning curve and due diligence can be a steep learning curve for the rookie investor.
No matter where you are at in your investment journey, it's never too early to plan and have a blueprint in mind. Speak to us about what that might look like. Everything is confidential, of course.
2. Risks
What are the risks of investing in property?
Market Risk
The property market moves in cycles, and at times there are external factors that cause a market-wide slowdown or downturn. If you focus on a long term investment horizon, you'll be able to weather these storms as the markets will eventually recover.
Liquidity Risk
Liquidity is the ease in which you gain access to money you have within an investment. Lack of liquidity, compared to other investments, is one of the disadvantages of property investment. Your situation may change, but you may be stuck with your property for several months or years, depending on the market cycle and your financial situation/requirements.
Interest Rate Risk
A rise in interest rates will affect variable-rate mortgages. This means that the cost of your debt can increase as the rate increases, which can put a strain on your cash flow.
Buying the wrong property
There are properties that are not "investment grade", and if you don’t do enough research, you might end up buying the wrong property at the wrong time.
Having the wrong property can mean that your investment could face years of slow or no growth or worst, no income due to high vacancy rates in the area.
Cash Flow Crunch
No tenant means no income. So you'll have a cash flow squeeze for a while. If you lose your job you may not be able to top up your rent to meet your mortgage repayments.
Legislative risks
Investment losses is a possible effect of any unfavourable government action. Changing negative gearing rules seems to come into discussion yearly around budget time – a move that would substantially undermine investor confidence.
How to minimise the risk of investing in property?
One way of minimising risk is to have a cash flow buffer in place for your personal needs or any unexpected investment expenses. Give yourself enough buffer in order to maintain and cope with any unexpected vacancies or maintenance.
Personally, take out life insurance and income protection. There’s also mortgage protection insurance which may prove to be more cost effective. Speak with your financial advisor to make sure you have a financial plan that protects you personally.
Also don’t forget important property protection such as landlord's insurance to protect your interests. Make sure you have insurance to sufficiently cover mortgage repayments should your cash flow be put on hold. Make sure to contact your accountant before purchasing an investment property to ensure you buy it in the most tax-effective manner.
Review your portfolio with a property strategist like it is a business. Ensure that you have the right loans and best interest rates, and assess when you're ready for your next acquisition.
If you need support setting up your wealth management plan with property, simply book in a time to have a chat with us.
3. Property Investing
Is it all about location, location, location?
As an investor, understand that location does most of the heavy lifting for your property investment success.
A strategic top-down approach to finding a property will outperform the general market
Start by looking at the macroeconomic environment- the big picture of how Australia's economy both in general and its outlook – especially in the eastern states.
Look for the right state location where you'd like to invest. Check the economic and population growth of the place. Both Melbourne and Sydney will strongly outperform the other states – they're forecast to deliver around two-thirds of the new jobs over the next few years.
Invest in the capital cities because that's where the bulk of the jobs opportunities will be created.
Look for the right suburb for your investment property – check the census statistics to find suburbs where wages growth is above average.
Look for the right location within that suburb. - Livable streets will always outperform others, and in those streets, some properties will always be more desirable than others and outperform as investments by increasing in value.
Look for the right property at a good price.
Download our 10-point checklist to ensure you’re making the right buying decision upfront
What approaches can be used for buying a property?
We suggest deploying this 6-Phased Strategic Property Investment Approach.
Buying property that would appeal to the owner-occupiers typically bodes well for shoring up local real estate values. This will be important over the next few years when the percentage of investors in the market may diminish*
Buy property below intrinsic value – avoid investing in new and off the plan properties which come at a premium price.
Buying property with a high land to asset ratio – not necessarily means a large plot of land, but a property with an attributable significant land component under them.
Buy in an area that has a long history of strong capital growth - that will continue to outperform the averages because of the demographics in the area**
Look for property with a difference – something unique, or special or scarce about the property.
Buy property where you could potentially manufacture capital growth through renovations or redevelopment rather than relying on the market to do it for you.
Property investment strategies are not just about mapping it out. It takes time, effort, and something most investors never attain – perspective and consistency of execution. These are invaluable in knowing how to invest in real estate.
*According to the Aus govt website 90% of the jobs up till 2023 will come from the following industries.
Health Care and Social Assistance
Construction
Education and Training
Professional, Scientific and Technical Services
**When looking for places to invest in property we look for places where governments are also investing in things like infracture, schools, hospitals, universities. We also look for what we call grey fill areas where there is a finite amount of land which is generally close to the major cities such as Melbourne and Sydney . As opposed to green fill areas which are newly developed estates which generally take longer for capital growth to occur
Do you need to understand the market to learn how to invest in property?
Timing the market is not the be-all and end-all; however, it still helps to understand how the property market moves and what to expect.
You’ll have more chances of nabbing a good deal in a buyer's market, when the property is out of favour.
Over the years, we've certainly refined our view on timing the market, especially if you're a seasoned investor.
Focus on long-term real estate investment.
Time in the market - owning a property that will outperform the averages in the long term will trump timing the market - making a one-off capital gain, but then often missing out on strong, long term growth.
What delivers the most capital growth?
Time in the market is what delivers the most capital growth.
Location is also key - see ‘what approaches can be used for buying a property’ above
New or old – Which are the best property investments?
It is like the houses vs. apartments debate, old and new properties each have their own benefits.
For the majority of investors, established properties will always offer far better capital growth potential than a new build for a lot of reasons.
What are the benefits of old versus new?
1. A BETTER DEAL
When you buy a new property, you're paying for the property and also handing over a premium to the developer for profits and marketing costs.
With established properties, on the other hand, you are able to look for property that is below intrinsic value.
2. VALUE ADD POTENTIAL
Buying a new property means everything is already done for you. It is truly appealing, but it is actually a disadvantage. You'll have to sacrifice the potential added value, or ability to "manufacture" capital growth, that comes with an established house or apartment.
3. BETTER THAN AN EDUCATED GUESS
When it comes to investing in real estate, it is important that you know your market. A new building doesn't come with a track record of property price growth to help you make an informed decision when it comes to pricing.
4. STRONGER PERFORMER IN A SLOWER MARKET
New apartments and houses are often the first to see prices soften when the overall market loses momentum. Often though, established homes will either maintain their value or experience very minimal adjustment.
What are the disadvantages of buying established?
Is there any point where purchasing a new build makes more financial sense?
Some proponents of new properties will argue that you forego numerous depreciation benefits when you buy older homes.
Buying an established property and undertaking renovations create these depreciation benefits - it should always come down to taking a long term view of the market.
How does tax factor into my property investment decision?
A whole raft of tax benefits available is one of the biggest reasons why investment property remains popular in Australia.
Whilst you shouldn't invest solely for tax benefits, they are a nice little bonus that makes keeping your property easier.
Things like claiming legitimate business expenses running your investment business as well as negative gearing - which allows investors to offset any shortfall between the rent that you collect from your property and the expenses you pay for it against your other income.
4. Property Management
Do I need a property manager?
Renting out your property allows you to earn an income from your investment, but you really need a proficient property manager for a well maintained and continuously tenanted property.
Your property manager is responsible for advertising your property, receiving enquiries during the leasing process, and screening and selecting tenants. They are also responsible for making sure that your property is properly maintained.
What are the common property management costs?
Aside from the initial fees that you need to pay when buying an investment real estate, you also have ongoing costs like council and water rates, insurance, body corporate fees, land tax, property management fees, and maintenance and repair costs.
These expenses are usually tax-deductible.
When it comes to insurance, you must not only take out building insurance, but you should also consider landlord insurance because this will protect you if a tenant damages property or leaves without paying rent.
Repair and maintenance costs should also be factored into your budget.
Should you manage your property yourself to save money?
You can choose to manage your investment property yourself, but be aware of the risks.
Property managers can set the right market rental rates and collect rent payments on time. They can also advertise your property astutely to avoid long vacancies.
When it comes to tenants, property managers can screen them and manage all aspects of the landlord-tenant relationship. They also often have connections with contractors, suppliers and maintenance workers, if ever you need one.
Property managers are also knowledgeable with housing regulations and property laws, so you can be sure that your properties are always complying with them.
What are some final words of advice (or warning) for investors?
It should come as no surprise that getting a good team around you will be an important investment and not an expense and should allow you to build a property portfolio that will go a long way to replacing their income in the future.
Learn that property investing is not a get rich quick scheme and to achieve your future financial goals, you will have to slowly build a substantial asset base and not chase short-term cash flow like many investors starting out.
Here are a few other final tips, so you'll know exactly how to invest:
Formulate a plan: understand your end goals – what you want to achieve – and then make investment decisions accordingly.
Be cautious: You'll find everyone is happy to give you advice. Rather than listening to well-meaning friends, it's important to only listen to people who have achieved the financial independence you're looking for and who have maintained it through a number of property cycles.
Understand the difference: between a salesperson and an advisor. Many salespeople are cloaked as advisors, and while they suggest they're representing you, in fact, they are representing the seller or a property developer. Only take advice from someone who is independent and unbiased rather than someone who is trying to sell you something.
Be prepared to pay for advice: Good advice is never expensive. In fact, it's much cheaper than learning from your property investment mistakes!
Not everything is an opportunity: Often, when you start out, it can be tempting to see opportunities everywhere. The problem is you don't yet have the perspective to decide what is a good investment and what is not.
5. Next Steps and Check-In
Are you looking to invest?
Even if the property markets are improving, it is still important to know the correct property selection because the selected market can outperform others.
Here at Sandcastle finance, our number one goal is to help our clients develop a financial plan around property in order to have the lifestyle they desire.
We step you through your wealth creation solution where…
We help you create your own property wealth blueprint to suit your lifestyle needs.
We help you find the best loans so that you can accumulate more properties quickly. In our experience low cost is just a start. Terms of the loan can quickly get you unstuck if you don’t know what you’re looking for.
We help you implement strategies to pay off loans faster saving you interest and enabling reinvestment into your wealth portfolio
Find out how you can finally get your property wealth plan underway once and for all.
